About: - Market Makers are generally considered the Forex Brokers that provide the bid and ask prices from their own system. Given that they considered as counterparty for a Forex transaction Market Makers are force to take the opposite transaction of their traders. For example if you buy 1 lot of EURUSD then they must sell 1 lot of EURUSD to you and the vice versa. If the Market Maker wishes to take the client’s side then he will cover it with a liquidity provider.
- In the case that the client’s position remains uncovered or not hedged with a liquidity provider then the Forex Broker will benefit from the client’s loss only. On other hand, if it decides to cover with a liquidity provider, then it will profit from the price it bought comparing to the price the client had entered the market. In other words, if the client bought 1 lot at 1.3759 of EURUSD the Forex Broker needs to hedge its risk with a better rate. Let’s assume that it covered the position at 1.3755. The difference between the client’s rate and the Forex Broker is 4 pips which in dollarized terms is $40 gross profit for the Broker.
- Now if the client closes his position with a total loss of $100 then it would be more beneficial for the Forex Broker not to cover the client’s order as the profit coming from not hedging the order is higher comparing to the option of covering the client and making only $40 from the spread difference.
Advantages of trading with a Market Maker
Despite that the Market Makers may act against their clients in some cases there are some advantages they have which are:
- The option of offering fixed spreads: During volatile times they opt to offer fixed spreads which tend to be lower than Forex Brokers that offer floating spreads. Moreover, fixed spreads are more preferable for Expert Advisors (EAs) as the automating programs are able to cope better when it comes to fixed spreads
- Stop Losses and negative balances are guaranteed: Because Market Makers provide their own bid and ask prices on their system you can never lose more money that you have in your account or your stop loss will not be activated at a worst rate than your predefined rate.
Higher Leverage: The stiff competition in the Forex industry created the option of offering higher leverage. In nowadays you can easily open an account with a Market Maker that offers a leverage of 1:500 or even higher.