Who are the market makers and how they influence?
In the classical definition, a market maker in exchange trading is a financial institution (firm) that undertakes to provide liquidity of a certain share at the exchange. These are mainly large banks, brokerage companies and dealing centers. A market maker is literally a “market maker”, he is involved in the market process in order for the market to be viable. There are a lot of market makers in the markets and they are all professional participants of exchange trading. They operate under the rules of the exchange and in accordance with the financial legislation. Market makers enter into contracts with stock exchanges where they undertake to ensure liquidity of certain shares, futures and currencies. That is, they should buy and sell financial instruments even if there are no sellers or buyers. In addition, market makers bring together buyers and sellers as an intermediary in transactions. Market makers collect purchase and sale orders and form prices.
Marker makers at Forex market
Market makers have always existed since the stock exchanges. But with the advent of the international currency exchange (Forex) market, their value has grown very much. The volume of transactions in the Forex market now amounts to more than 5 trillion dollars. Market makers account for a significant part of the operations. More than 50 percent of this turnover is provided by four European banks. These are the English RBS and Barclays, the German Deutsche Bank and the Swiss UBS. The American banks Bank of America, Goldman Sachs, JP Morgan, Morgan Stanley have a relatively large share.
The cost of a standard contract in the Forex market is 5 million dollars. It is clear that ordinary traders and many banks cannot operate with such amounts. Therefore, market makers collect smaller orders in the so-called “pool”. Submit applications to the “pools” of large brokerage companies (prime brokers). Prime brokers themselves accept orders over $10,000 from retail brokers, in which ordinary traders speculators trade.
Modern market maker functions
If you divide the total trading volume into a standard contract, you get more than a million transactions per day. Taking into account that the market is not active round the clock, up to a million contracts can be made hourly. So the liquidity on Forex is full. It turns out that in the conditions of the modern currency market the role of market makers has changed somewhat. Forex regulation also applies to them. They earn mainly on the difference in bid and ask prices when executing clients’ orders. Market makers have the right to trade currency for their own money. Hence the rumors that they’re moving prices at their own discretion. In fact, market makers buy and sell currency only when the number of sellers or buyers in the market has dropped significantly due to an event. They thus stabilize prices and prevent chaos. But they sell currency at a very high price (spread apart), reducing demand, and buy at an underestimated price, reducing supply. In addition, the market maker immediately creates the opposite position or buys the futures to prevent his own losses. That is, in fact, market makers do not move prices, but perform their main task of providing liquidity