Can market makers manipulate prices in the market?
it depends what you mean by “the market”
in the so-called “market” that they’re making, yes, of course, by definition: they make the “market” and its prices
but that isn’t a real market - it’s just a set of “prices” for their own “product” which enables their customers to place bets against them
if you’re asking whether a spot forex broker can manipulate the prices of the currency markets (interbank market), then no, clearly not - they have no influence over it
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Market makers, by definition, help ensure liquidity in the markets by both buying and selling securities throughout the day. Their role is to provide a continuous flow of bid and ask prices, making it possible for buyers and sellers to execute transactions at any given time.
In theory, market makers have the potential to influence prices, especially in less liquid markets where there are fewer participants. They might adjust their bid and ask prices based on supply and demand dynamics, potentially moving prices slightly. However, it’s important to note that in highly liquid, well-regulated markets, such as major stock exchanges, the potential for a single market maker to significantly influence prices is quite limited due to the high level of competition.
It is also important to stress that any manipulation of prices is illegal and is considered a fraudulent activity.
Securities regulations, such as those enforced by the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), have strict rules and guidelines in place to prevent market manipulation and protect investors. These entities regularly monitor trading activities and take action against any individuals or firms found to be engaging in manipulative practices.
It’s also worth noting that many financial markets have now become largely automated with the rise of electronic trading and high-frequency trading firms. These developments have led to tighter bid-ask spreads and a reduced role for traditional market makers, thereby further reducing the potential for price manipulation.
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A market maker will continuously revise their price quotes for their clients so that their risk exposure is managed and their profits are not damaged. But those quotes only apply to their clients.
Its like the supermarket to the north of your house might charge you more for bread than the supermarket to the west of your house. But neither of them is manipulating the price in the market, they are just running their own businesses - there is no fixed price anyway since the only place you can get bread is a supermarket. Its your choice which you deal with.
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Market makers can influence prices in the market, but it’s important to distinguish between legitimate activities and manipulation.
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Whenever there is money to be had, there will always be get rich quick people, some of whom are fraudulent.
Therefore it is wise to avoid unknown apps offering a trading platform, and only open up an account with a well known properly regulated broker who keeps customer monies in a bank seperate from their monies. One such is ICMarkets where my money is traded.
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So far I know it is possible in stock market but forex is decentralized and I am little confused about it.
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Got it, so their influence is limited to their own platform, not the broader market. Thanks for clarifying!
Understanding the role of market makers in financial markets provides crucial insight into how prices are set and how liquidity is maintained. Market makers can indeed influence prices to a certain extent by adjusting their bid and ask prices based on the current supply and demand dynamics. This role is particularly pronounced in less liquid markets, where their actions can have a more noticeable impact on price movements. However, the concept that they can significantly manipulate market prices in highly liquid and well-regulated environments, such as major stock exchanges, seems far less plausible. The competitive nature of these markets, coupled with the presence of numerous participants, inherently limits the extent of influence any single market maker can exert.
Makes sense, so it’s more about managing their own business rather than manipulating the broader market. The analogy with supermarkets puts it in perspective.
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Got it, focusing on reputable, regulated brokers like ICMarkets for safety makes total sense. Appreciate the heads-up on steering clear of unknown apps. Thanks!