Have you ever wondered how you can buy or sell currency pairs in forex at any given time? Forex is a market that trades non stop for 5 working days a week. Despite being a global event, the probability of finding a trader willing to make a trade in currency pairs of our choice at any given point in time is very small. And yet every single trade in forex gets completed within seconds. This happens because of the functioning of forex market makers.
A market maker is a mediator whose job is to create a virtual market for the trader. The moment we place an order to buy/sell, the market maker carries out the trade, irrespective of its own loss or profit. In forex, the list of market makers comprises investment banks, central banks, commercial banks and big brokerage firms. These institutions are always stand ready with a fixed bid and ask price. A market-maker offers services in both rising and falling market scenarios.
How does a Market Maker Generate Profit?
There is nothing like a free service in the world. Market makers must get something out of the facilities they provide. They make money by:
- Buying the securities at a price lower than its selling price.
- Selling the securities at a higher price than the buying price.
Thus, in short, we can say that makers of market, make money by taking advantage of the difference between the bid and offer prices. This bid/offer spread depends on the liquidity of the market and the transaction size.
Why do we Need Market Makers in Forex?
Market-makers in forex ensure that the trade floor is always functional. They constantly update their bid/offer spread (twice in a minute), in accordance with the market updates. This helps on two fronts. Firstly, the trader gets an accurate view of the market for making decisions. Secondly, this ensures market liquidity and efficiency of currency pairs. It is this form of marketing solution that has ensured the 24-hour trading system of forex.
With the advent of forex market makers, players such as large multinational companies and registered money brokers, have started locking horns with the likes of big investment banks in the field of forex trading. Some of the most famous forex market makers are CMS Forex, Forex Capital Markets and Gain Capital. These are all regulated and managed by the Commodity Futures Trading Commission of USA.