HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
Vantage information and reviews
Vantage
85%
XM information and reviews
XM
82%

What Is a Market Maker?


Tom Tragett   Written by Tom Tragett

Anyone who's generally familiar with trading has heard about buyers, sellers and brokers. But there's one type of market participant that often gets overlooked: market makers. If you want to do well in the trading world, you should learn who's running the financial markets and who stands in your way. In this guide, we'll cover everything from a broad definition to common myths and trading advice.

Anyone who's generally familiar with trading has heard about buyers, sellers and brokers. But there's one type of market participant that often gets overlooked: market makers.

If you want to do well in the trading world, you should learn who's running the financial markets and who stands in your way. In this guide, we'll cover everything from a broad definition to common myths and trading advice.

Market Maker Definition

Market makers are also referred to as liquidity providers, which vaguely explains what they do. Market makers are usually large banks or financial institutions that keep the market functional by infusing liquidity. In simple terms, they ensure financial assets can easily become 'usable' money. If you want to sell an asset, they're there to buy it. If you're going to buy an asset, they can sell it. In turn, they take a commission in the form of the bid-ask spread.

Market making is prevalent in currency exchange, where the participants tend to be banks and foreign exchange trading firms. In theory, an individual can also 'make a market', but the size of the investments needed is a huge hindrance. It takes enormous funds to be able to always stand at the ready to buy or sell.

Example of a Market Maker: Say the current market price of EUR/USD is $1.05. Suddenly, there's news indicating that the EUR is going to rise. This should prompt individual traders to place market orders at $1.05. However, there will likely be an influx of buy orders at some point. A market maker, anticipating this behaviour, sets the price at $1.10. Because of the high number of market orders, the market price may rise, let's say, to $1.15, and because of demand, fall back to $1.12. A market maker will then sell their EUR/USD inventory to meet peak demand at $1.15 and restock it when it drops to $1.12.

Types of Market Makers

We can distinguish three types of market makers by their specialisation: retail, institutional and wholesale.

How Do Market Makers Work?

Market makers control how many asset units (stock, currency, etc.) are available for the market. Based on the current supply and demand of said asset, they adjust the price. They provide liquidity for the order book by placing orders that can be matched in the future. Then, market takers (traders, for example) consume the inventory by taking the order from the order book.

Market makers are known to hold a disproportionately large number of assets. The reason why is they need to be ready for a high volume of orders in a short time at competitive pricing. If investors are buying, they're supposed to keep selling, and vice versa. They take the opposite side of trades being executed at any given time, i.e., acting as a counterparty.

Each market has its own market makers, which means that each broker uses a quote given by one or several market makers when offering prices to clients.

What Is the Role of a Market Maker?

To better understand what a market maker does, it's worth looking into the functions they perform in the market.

Intermediation

By intermediary function, we mean several ways of intervening in the market:

How Do Market Makers Make Money?

Market making is associated with risk brought over to trading books. To compensate for that risk, a market maker charges a fee in the form of commissions or the spread. Unlike traders, a market maker doesn't raise money by buying low or selling high.

Let's look closely at the two most important sources of market-making:

How Do Market Makers Make Money?

How Do Market Makers Make Money?

How to Become a Market Maker

Anyone can become a market maker/liquidity provider if they meet the requirements. The catch is that it's practically impossible for a regular person to perform minimum trading functions. More commonly, only a large institution can sustain the required volume of trading.

But if you're interested in the process of becoming a dedicated market maker, here's how it goes:

  1. Verify eligibility and become familiar with exchange expectations.
  2. Complete all necessary paperwork to get a market maker permit.
  3. Apply to authorised exchange staff.
  4. Provide proof for Guaranteed Minimum Fill for eligible orders.
  5. Wait for the solicitation and approval process.

If we look at the topic more broadly, we can disregard the official "market maker" title. In essence, any participant with a significant share of operational volume makes the market in a way.

Advantages and Disadvantages of Market Making

The advantages of the market maker concept are exciting for smaller accounts and private investors. As for disadvantages, they're primarily applicable to advanced traders.

Advantages

Disadvantages

Market Maker vs Broker

Let's avoid confusing market makers with brokers because they seem similar in many ways. The table below compares the two.

Market Maker

Broker

Acts as a source of liquidity for exchange-traded assets

Facilitates selling an asset to a seller and purchasing for a buyer

Large banks or financial institutions

Individuals or firms

Heavily influences the market

Doesn't have a direct effect on the market

Charges spreads between the price that traders receive and the one the market sets

Charges fees and commissions

Has deep market insight (an advance look at all incoming orders)

Possesses the same information as the rest of the market

Doesn't work for clients; instead, they create a market for investors

Provides services for clients (consulting research, investment advice)

List of the Largest Market Makers

Below is the list of market makers that are considered the largest in the world. Bear in mind that it's hard to compile their exact rating, but here are the companies that are worth traders' attention.

Myths About Market Makers

Most of us have heard the assumption that the market is manipulated by some power driving prices in whatever direction they need. If these claims come from newbies, it makes sense. However, blaming all losses on shadowy puppeteers can quickly become detrimental. Below are several myths that we can clarify.

Why Should Traders and Investors Be Aware of Market Making?

Market makers have a significant impact on the market and, hence, your trading success. Here's how you can use that to your advantage.

Conclusion

It's undeniable that the market maker's role is technically difficult but has real value for the market and exchanges. These participants must commit to maintaining fair prices for different types of assets and covering demand at any time. You may not have known it before, but market makers have always been present in financial markets. Otherwise, large-volume orders would only be executed with long delays, making trading impossible.

To get started on the right note, sign up for a demo account at Libertex. You can use it to practice and master your strategy in a simulated market.

When you upgrade to a live account, you'll already be accustomed to how the market works and make sound decisions. And thanks to market makers and our platform, you can open positions within a matter of seconds.But please note that trading CFDs with a multiplier can be risky and lead to losing all of your invested capital.

FAQ

Finally, here's a quick round-up for this topic.

#source


RELATED

How to Effectively Assess Your Forex Trading Performance

In the fast-paced world of Forex trading, constant growth and adaptation are essential. This not only demands a thorough understanding of the market dynamics but also necessitates regular assessment of one's trading performance...

Oil Is Black Gold for CFD Trading

Oil is a mineral used to produce fuel. And it is also used as a raw material for household chemicals, cosmetics, clothes and many other products are made from it. But not only. Oil is also a popular commodity...

Regulators Affecting the US Dollar

The value of the US Dollar can be affected by a number of different factors, such as the Central Regulator, also known as The Federal Reserve. The Central Bank...

Common Trading Mistakes Every Trader Should Avoid

Trading in financial markets can be both exhilarating and profitable, but it's essential to navigate this world with caution and discipline. Many traders, especially beginners, often fall into common pitfalls...

How to use MT4 WebTrader: A Useful Guide

In 2005, the MetaQuotes Software released the MetaTrader 4 trading platform which is an electronic trading platform that includes all the required features...

What Is Bitcoin and How Does It Work?

You must have heard about it. The first and most famous cryptocurrency has been in the headlines due to a vertiginous increase in value, breaking the threshold of $1,000 for the first time on 1 January 2017...

What is ECN/STP trading?

It is a broker's business model in which clients` orders are sent directly to one or several liquidity providers to be executed on their end. Liquidity providers include companies...

Scalping: When Seconds Count

Today we will be talking about scalping as a trading approach. Scalping is characterized by very short-term trades with minor price changes and a profit of several ticks...

Relative Strength Index (RSI): Unveiling Price Momentum and Overbought/Oversold Conditions

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. Developed by J. Welles Wilder, RSI ranges from 0 to 100...

What is a Fan Token?

With the invention of social networking sites such as Facebook, Instagram, and YouTube, you can now engage and connect with famous people continuously. The cryptocurrency industry...

How to Build and Diversify Your Ideal Crypto Portfolio

Crypto portfolio allocation is crucial to survival over the longer term. You are betting on the future when trading a cryptocurrency or investing in it. The future is uncertain...

Strongest and Most Valuable Currencies in the Global Landscape

In the realm of international economics and trade, the strength and value of a currency play a vital role. A strong currency reflects the health of its nation's economy and its global economic stature...

How to Trade During the US Presidential Election?

Unless you've been hiding under a rock for the past year, you've probably heard, read, or participated in some heated discussions about the US presidential race...

Is it Easy to Learn Forex? A Comprehensive Guide to Mastering Forex Trading

Forex trading is a popular and potentially lucrative way to earn both active and passive income. However, it's essential to understand that learning forex is an ongoing process that doesn't depend on whether...

Beginner’s Guide to Indices Trading

An index tracks the performance of a group of securities or assets, based on predefined characteristics and features. Indices can be organised around industry...

Forex vs. CFD: Which One is Better?

Probably, every trader has faced the abbreviation CFD. But if you ask what this means, in most cases, the answer is: it's something similar to Forex, only for stocks...

Mastering the Art of Automated Trading: A Comprehensive Guide to Trading Robots

In the digital age, trading robots have revolutionized the financial markets, providing traders with a high-tech assistant to navigate the complex world of trading...

Cent and standard accounts: differences and similarities

Trading on the Forex market always starts with creating a trading account. At FBS, this process is simple: you choose an account to your liking, register, and verify it...

Foundations of Financial Trading: A Comprehensive Introduction

Welcome to the fascinating world of financial trading, an arena where the exchange of financial assets between buyers and sellers shapes the global economy...

Ultimate guide to trading Polkadot for beginners

Blockchains and the innovations they offer largely existed as isolated entities in the crypto space, unable to share value or communicate with each other...

FP Markets information and reviews
FP Markets
81%
RoboForex information and reviews
RoboForex
77%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.