Market Maker Forex Brokers
Richard Montana | November 2, 2022
When you are looking for a forex broker, you will come across a few different types of forex brokers that you can choose from. The main types of forex broker are non-dealing (NDD) desk brokers and dealing desk (DD) brokers who are also known as “market makers”. They create their own markets based on the underlying market whereas NDD brokers act as intermediaries between the trader and the real market, and receive a defined and transparent commission for it. Market makers are essential for the smooth functioning of the forex market, but there are some pros and cons to consider.
What is a market maker broker?
A market maker in forex is a broker that provides liquidity to the market by buying and selling currencies at their own price. This allows them to make a profit on the spread between the bid and ask price of a currency pair.
A market maker, sometimes called a designated broker (DB), plays an essential role in how a currency pair trades and ensures the continued and efficient exchange of currencies between buyers and sellers in the forex market.
There are two main types of market makers: retail and institutional. Institutional market makers can be banks or other large corporations that usually offer a bid/ask quote to other banks, institutions, ECNs or even retail market makers. Retail market makers are usually companies dedicated to offering retail forex trading services to individual traders.
What does a forex market maker broker do?
A market maker broker is the one who continuously buys and sells a currency at an openly quoted price in the OTC market. A forex market maker essentially does three things:
- Sets bid and offer prices within a certain currency pair
- Commits to accepting deals at these prices within certain constraints
- Takes the resulting exposure on to their own book (at least initially)
Forex market makers vs electronic communications networks (ECN) brokers
An ECN forex broker can be seen as a middle man between buyers and sellers with no interest in manipulating prices. On the other hand, if your broker is a market maker, your interests are not always aligned with those of your broker. A market maker is essentially taking the opposite side of your trades which many believe can create a conflict of interest.
You will often find that the combination of a small commission and a tight spread makes trading with an ECN broker cheaper than with a traditional market maker broker. ECN brokers generally offer affordable trading costs, transparent pricing, tighter spreads, around-the-clock trading, and some anonymity to your trading.
What is a hybrid forex broker?
While your forex broker is always the counterparty to your trades, a hybrid approach is where the broker may decide to execute your trades internally as a market maker or offset your trades externally to a liquidity provider.
The broker can divide its customers and hedge the trades of some of the customers to an LP (A-Book or STP) and keep the rest “in-house” (B-Book). The broker could also decide to hedge all trades of a certain size or larger to a liquidity provider and keep the rest “in-house” (B-Book).
The popularity of the hybrid model is justified as it allows brokerages to take advantage of the two above-mentioned models. The entire tactic rests upon identifying a chosen group of traders who are profitable and send their trades to the real market while keeping the remaining part in-house.
Do market makers manipulate prices?
Market makers can make money from the bid/offer spread. The more actively a currency pair is traded the more money a market maker makes. It is often felt that the market makers manipulate the prices as they can take the opposite position of your trade and earn more from setting higher spreads than those that they get from the market.
What are the advantages of a market maker forex broker?
- They can provide liquidity at all times
- They do not always charge a commission fee
- Lower minimum deposit requirements
- Provide micro/mini lot accounts
- Can trade with fixed spreads
What are the disadvantages of a market maker forex broker?
- Spreads can be higher than usual (mark-ups)
- Execution speeds can take longer (slippage)
- Potential conflict of interest
Who are the best market maker forex brokers?
There are hundreds of forex market maker brokers that you can trade with. The majority of them will offer a great selection of major, minor and exotic currency pairs. Below you can see a selection of our best market making forex brokers.
ASIC, BaFin, CFTC, DFSA, FCA, FINMA, FMA, FSA, FSCA, JFSA, MAFF, MAS, METI, NFA
Conclusion: should I use a market maker forex broker?
Market makers are useful because they are always ready to buy and sell as long as the trader is willing to pay a specific price. Market makers essentially act as wholesalers by buying and selling currencies to satisfy the market – the prices they set reflect market supply and demand.
They can provide certain trading account features that ECN brokers cannot, such as fixed spreads, no commission fees, lower deposits and smaller position sizes. However, they can also take the opposite side of your position and add a spread mark-up.
You should weigh up the pros and cons of a market maker broker and decide if they are suitable for your trading strategy. Think about if you would feel comfortable knowing that you are using a forex broker that can trad against you compared to a NDD broker that sends your orders directly through to the forex market.
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