Market Makers | finance tycoons
Market makers or trading desk brokers represent a type of broker who internalizes flows and reverses a transaction submitted by their clients.
The market maker broker only quotes a stream of prices to its clients. These flows may or may not be exactly the same as the prices quoted in the interbank market.
Any order entered by a client is processed internally and never exits to the market, except in rare cases where a market making brokerage firm identifies a client as very high risk and chooses to route the flow to a another liquidity provider.
These brokers generally provide very fast execution, but an inherent conflict of interest is possible due to the brokers earning most of their profits from client losses.
Role of market makers in the forex industry
In the FX space, a market maker quotes two-way prices for tradable currency pairs. In doing so, these market makers literally make the market.
In particular, a forex market maker performs three specific tasks.
This includes setting buy and sell prices in a given currency pair, committing to accept offers at those prices within certain constraints, and taking the resulting exposure on their own portfolio.
In terms of accounting for this exposure in their portfolio, market makers may choose to hedge the exposure with another bank, pending favorable rates.
How fast or slow, or how risky they dismiss will be at their own discretion.
Market makers can make profits through several techniques.
If these entities identify sufficient flow on both sides of their quote, they can simply collect the bid-ask spread.
Therefore, market makers can offset their exposure. Currently, major banks are seeing huge flows of foreign currency transactions from their operations around the world in a multi-trillion-dollar-a-day industry.