Market Makers In Foreign Exchange

We all know that foreign exchange market is a place where a pair of currencies are bought and sold for profit at a moment’s notice. The trade is executed within seconds. But in reality, it is not as simple as that.

How can the investors be sure that he will always find who is interested to buy and sell the same two currencies at the same amount, and at the same time. ?” This is where the foreign exchange market makers step in. They make it possible that the investor can buy or sell at any time. Read on know a little more on market makers in foreign exchange online.

What is a market maker?

The foreign exchange market maker can be a bank or brokerage company that stands ready, every second of the trading day with a firm bid and ask price. This is very helpful for the investor for he can buy or sell the currency pairs whenever he wants. He need not have a buyer lined up.

It is these market makers in foreign exchange who purchase from and sell to the investor, acting as a counterpart to the client. They do not operate as an intermediary or trustee and hedge of its clients' positions according to its policy. They are literally “making a market” for the currencies.

Although there is nothing personal between the market maker and the customer, they offset between clients' opposite positions, hedging their net exposure according to their risk management policies. Foreign exchange market makers are not portfolio managers or advisors for the investors. They just are buying and selling currencies to the trader. Indifferent to the intention of the trader and providing a two-sided quote, the relationship between the trader and the market maker is simply based on the fundamental market forces of supply and demand.

Can a market maker control market prices against a client’s position?

Of course not. No single participant in foreign exchange market is powerful enough to push prices in a particular direction. Being the biggest market in the world today, with daily volumes touching 3 trillion dollars, no market maker in foreign exchange online is in a position to effectively manipulate the market.

Main source of earnings for foreign exchange market makers

The main source of earnings for market makers is the spread between the bid and the ask prices. Maintaining neutrality regarding the direction of any or all deals made by its traders, they earn their income from the spread.

Market makers in foreign exchange online keep the market functional, ensuring that the currencies in it will always fetch the market rate. In order to do so, they keep updating their prices at intervals of at least 30 seconds. Irrespective of the economic situation, the market makers must fulfill their obligations, whether it is favorable or unfavorable or whether they lose or gain profit.

Until recent times, the central banks, commercial banks and investment banks dominated the foreign exchange market. But, today, due to the entry of foreign exchange market makers, like the international money brokers, large multinational companies, registered dealers, global money managers, and private speculators, also play a major role in the functioning of the market.