Unfortunately, you’re not alone in having this misconception about market makers. Even if a broker tells you they are not a market maker themselves, they must still offset your orders with a market maker. That’s because market makers provide a vital function, not only in forex, but in many financial markets, including the major futures and stock exchanges.
Consider what the world’s largest stock exchange says about how their market model works:
The cornerstone of the NYSE market model is the Designated Market Maker (DMM). DMMs have obligations to maintain fair and orderly markets for their assigned securities. They operate both manually and electronically to facilitate price discovery during market opens, closes and during periods of trading imbalances or instability. This high touch approach is crucial for offering the best prices, dampening volatility, adding liquidity and enhancing value.
DMMs apply their market experience and judgment of dynamic trading conditions, macroeconomic news and industry-specific intelligence, to inform their decisions. A valuable resource for our listed company community, DMMs offer insights, while making capital commitments, maintaining market integrity, and supporting price discovery.
In regards to US-regulated brokers, the reason only four firms are currently approved as forex dealer members as of the latest data from the CFTC is precisely because the standards are so rigorous both for financial transparency and for accountability regarding the price where each customer transaction is executed. Below is a quote from the CFTC site:
The final rules include financial requirements designed to ensure the financial integrity of firms engaging in retail forex transactions and robust customer protections. For example, FCMs and RFEDs are required to maintain net capital of $20 million plus 5 percent of the amount, if any, by which liabilities to retail forex customers exceed $10 million. Leverage in retail forex customer accounts will be subject to a security deposit requirement to be set by the National Futures Association within limits provided by the Commission. All retail forex counterparties and intermediaries are required to distribute forex-specific risk disclosure statements to customers and comply with comprehensive recordkeeping and reporting requirements.
Full disclosure: FOREX.com is a market maker, but that’s not why we defend this model. Rather, we are a market maker, because we believe market making is the best way to provide our clients with reliable pricing while effectively managing our own risk. We are fully accountable for every execution and don’t outsource that responsibility to a third party. It’s not our intention to make this discussion about ourselves, but we wanted to address the misconceptions some traders have about the market makers that play a vital role in financial markets.