Brokers who offer Forex (FX) and Contracts For Difference (CFDs) can market make provided that they have obtained a market maker license from the regulator. The market maker license is usually more expensive and requires more capital from the broker.
Broker Review Contents
What does market making in Forex (FX) and Contracts for difference (CFDs) mean?
When a broker market makes it means that they are taking the opposite side of your trade by default. They run what’s called a book and by accumulating trades from traders who buy or sell, they try to either balance their book so they don’t carry market risk and only make money from the spread (the difference between the buy and sell price which all FX and CFD traders pay) or they have some exposure to the market which allows them to make more money from the losing traders.
Why do brokers market make?
As most of you know, most retail traders lose money, so if I know that most of my customers will lose money on 7,8 or 9 out of 10 trades, I might as well provide them liquidity and take the opposite side of these trades.
This practice leads to concerns among traders about conflict of interest and the integrity of market maker brokers.
Should you be concerned when you trade with a Market Maker (MM) broker?
If the broker is regulated and reputable you should not have concerns. Most Market Makers (MM) have the option to Straight Through Process (STP) traders who are good and make money. Therefore the concern that they will go on the individual account level and somehow manipulate conditions against you is not a valid one. Most times they would simply process your orders to another liquidity provider or directly to the market if you are a good trader. It’s up to their risk team’s discretion to decide whether to market make or STP a trader.
Consider that in trading there is always someone on the other side of the trade, whether it’s the broker, another trader or another market maker(liquidity provider).
Also keep in mind that nowadays the whole process of market making with most market maker (MM) brokers is automated. This means that the broker accepts the orders automatically rather than a dealer individually reviewing an order before accepting it.
Maybe the biggest valid concern when dealing with market maker (MM) brokers is that because they take on market risk, if they are on the wrong side of a trade, they may end up losing so much money to the point of bankruptcy.
This is why it’s important to consider regulated brokers which keep their own funds separate from client funds and also have a compensation scheme or insurance in case of default.
Are there advantages to using market maker (MM) brokers?
Market Makers usually have lower requirements in terms of minimum deposit and trade size.
They are able to offer much tighter spreads than what the underlying market offers. Some of them can even offer spreads starting from 0 for FX.
This by default also means that you may be able to get better prices than what the underlying market has.
This means that the capital and costs are much lower when you trade with a market maker (MM).