Friday, 2 October 2009

Trading Forex Online - Market Makers

Trading Forex Online - Market Makers


A Market Maker is the counterparty to the client. The Market Maker does not operate as an intermediate or trustee.
A Market Maker performs the hedging of its clients’ positions according to its policy, which includes offsetting various clients’ positions, hedging via liquidity providers (banks) and its equity capital, at its discretion.
Who are the Market Makers in the Forex industry?Banks, for example, or trading platforms, who buy and sell financial instruments at the market. That is contrary to intermediates, which represent clients, basing their income on commission.
Do Market Makers go against a client’s position?By definition, a Market Maker is the counterparty to all its clients’ positions, and he always offers a two-sided quote (two rates: BUY and SELL). Therefore, there is nothing personal with the trading conduct between the Market Maker and the customer.
Market Makers regard the total positions of their clients as a whole, same goes for banks and other market makers in the Forex market. They offset between clients’ opposite positions, and hedge their net exposure according to authorities’ guidelines and their risk management policies.
Do market makers and clients have a conflict of interest?Market makers are not intermediates, neither portfolio managers, nor advisors who represent customers (while earning commission), but rather they buy and sell goods to the customer. By definition, the Market Maker always provides a two-sided quote (the sell and the buy price), hence maintains neutrality as for the client.
Banks do that, same with merchants in the markets, who buy goods and sell it to customers. The relationship between the trader (the customer) and the Market Maker (the bank; the trading platform; etc.) is simply based on fundamental market forces: supply and demand.
Can a Market Maker influence market prices against clients’ position?Definitely not, because the Forex market is the nearest to being a “perfect market” (as defined by economics theory).
This is the biggest market today, reaching a daily volume of 3 trillion dollars throughout the globe. That means that there is no single participant in the market, banks and governments included, who can consistently push the price in a certain direction.
How do Market Makers manage their exposure?The way most Market Makers hedge their exposure is to hedge on bulk. They aggregate all clients’ positions and pass some, or all, of their net risk to their liquidity providers

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