How do market makers actually work?
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  1. #1
    Join Date
    Mar 2006

    Default How do market makers actually work?

    Do they just create an insulated market between their own customers or are they part of the wider FX market and simply act as the middleman?

    Do they balance who is long and who is short within their own system before accepting a trade, and is it usual for them to hold prices until they are in profit themselves?

    I'm just very confused on how they actually do their business.

    Can anyone give me some insight on this? Thanks!

  2. #2
    Join Date
    Mar 2006
    Market makers match the buy orders with the sell orders.

    they make money by making the trader pay the spread on the pair(3 - 5 pips)

    Alot of market makers take the other side of a trade which is easier for them than to find a buyer and a seller.
    And it's mostly automated by computer systems, except at the larger firms. For the really big orders they have trading desks and are done manually.

  3. #3
    Join Date
    Apr 2006
    yeah, i just read a little bit about that in the currenct issue of Currency Trader magazine. It's free and online!

  4. #4
    Join Date
    Mar 2009
    Quote Originally Posted by JHaskins295 View Post
    yeah, i just read a little bit about that in the currenct issue of Currency Trader magazine. It's free and online!
    and it is chuck full of advertising but that is not a problem. It would be suspicious were it not. I was wondering where to find that world information and analysis before finding this. I have been told that this is the other side of the coin from simply predicting the future.

  5. #5
    Join Date
    Mar 2009
    the complete story of market makers is a small book unto itself, but i shall try to shorten it a bit, and hope it remains understandable

    we know that a market maker "makes" the market -- holding buy and sell orders to be completed in his/her "book" (which is now a computerized program and not a real written list)

    market makers raise the price based on demand and supply (supposedly) and lower it accordingly, but in reality they will raise a price higher and higher, borrowing shares if they cannot cover the trades through their own inventory ---- NOW, once they have raised the price to RESISTANCE (and often based on the time of day) they will immediately switch to SHORTING the price, selling their "borrowed" shares first and pushing the price DOWN. the retail trading public, seeing the price drop, immediately starts selling their shares, which are grabbed by the SHORTS, the mm included !

    as the price drops, the shorts pick up more and more of the longs desperate selling getting more and more shares at a cheaper and cheaper price.

    through all this, the mms have RETURNED the shares they borrowed to sell long during the run up, and have now made money by shorting them on the way down.

    at some point support is hit (depending completely on momo and the time of day) and the whole silly game begins again, with the mm's driving the price UP, retail traders hoping on the bandwagon, and the price moves higher and higher as the mm's simply move it up.

    NOW, after the fact for most newbs, you can observe how the ups and down cycles are leading towards a trend --- if the "highs" are higher each time one is reached, we are in an UPTREND, and reverse that for a downtrend and how THAT is decided is a story for another day, but it IS decided !

    we have all been told its supply and demand, and while (depending exactly how you use language) it has "something" to do with it, its reality is one of a market that is being manipulated constantly, which is EXACTLY how each and every trading market works !

    if this were not so, NO ONE could predict what would happen at noon, edst or at the 5pm rollover, but since good traders can and do every day, it follows that they already know what ive just posted.

    OBSERVE your market, and you will soon understand also !

    Last edited by che quivara; 03-08-2009 at 04:09 PM.

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