Market Makers: What they are and how they work

In the Forex market, different types of Forex brokers adjust to a specific client profile and offer different instruments and trading terms. Among them, you will find the Non-Dealing Desk (NDD), the Market Makers (MM) or Dealing Desk (DD), and the hybrid brokers.

All of them have characteristics that differentiate them, but their objective, which they share, is to offer you the investment options that best suit your particular situation. Their job is to mediate between your capital and the investment or dealing desk.

The intermediation of a broker to carry out your transactions is something daily and elementary. That is why it is interesting for you to know how to create your broker and thus start trading in this dynamic market with all the necessary knowledge.

Let’s learn, in this opportunity, everything related to Market Makers, their functions, advantages, and disadvantages, among other elements that characterize them.

Market Makers, who are they?

Market maker brokers carry out transactions of buying and selling, of currencies, commodities, stocks, indexes, among other instruments, in their trading desks, which is why they are also called Dealing Desk DD brokers.

But what does this mean? To be clear, this means that DD brokers create a market for their clients to buy and sell. Another advantage is that, it is not necessary to wait for another investor to buy or sell the instrument.

Market makers are always ready to make available to traders a selling price, called “ask,” and a buying price, called “bid,” of the instrument to be traded.

In this case, market makers always take on the role of counterparties to all operations carried out by traders; they do not negotiate with liquidity providers.

NDD or non-dealing desk brokers must send their transactions to the market, also known as liquidity. They are brokers that obtain the counterparty from Forex liquidity providers,  which may seem quite simple and an almost secure transaction due to the large size of the market.

Functions and Profits of Market Makers

When a client or a trader requests a purchase or sale transaction, the broker assumes the transaction as a counterparty, which ensures the liquidity of the operation. This may represent for the Market Maker broker a risk that turns into a profit or a loss.

This risk is offset when the Market Maker uses a spread, which is the increment applied to the bid or ask price. This spread compensates for the risks of covering such transactions.

The spreads offered by market makers are varied, and you can choose to quote above or below the actual market price. This increase would be the payment they receive, although they are small sums, they are compensated for the volumes handled.

It is also the case that Market Makers trade against their clients before backing as opposed to liquidity providers, this practice is not illegal, but there may be conflicts of interest between the traders and the broker, which is more critical when the broker is not only an intermediary but also the counterparty to the transactions.

In these cases, we recommend you to work with reliable, authorized brokers or brokers that have a reliable track record. White Label solutions are also available which not only allow you to get a trading platform from a MetaQuotes authorized provider such as Smart Broker Solutions but also offer you everything you need to start trading immediately.

Advantages of Market Makers

The main advantage of the Market Maker is that it incorporates to the Forex world a very agile way of investing, ensuring the execution of the investment transactions of the financial instrument you wish to trade. Other advantages are the following:

  • Market Makers offer the possibility to open an account with small deposits.
  • They offer the possibility of leverage higher than 1:100, which is the usual one.
  • Bid and Ask costs are usually more stable than those offered by Non-Dealing Desk brokers.
  • Thanks to Market Makers, it is possible for retail investors to access markets that were only available to large consortiums, financial institutions, industries, among others.
  • Thanks to market makers, mini lots and micro lots are available, which are smaller lots than those usually offered in the Forex market.

Disadvantages of Market Maker

The main disadvantages of this type of broker are:

  • The cost may change slightly concerning the interbank market.
  • There may be a conflict when they cannot assume the counterparty of the transaction.
  • When dealing desks are not properly managed, there may be a risk of bankruptcy declaration by the Market Maker.
  • There may be a conflict of interest in the loss of their client’s operations.

In any case, Market Maker Brokers may offer more advantages than NDD Brokers, but there may be a conflict of interest, so your choice should be based on their reputation.

At Smart Broker Solutions, we are at your disposal to give you the advice you require when you want to create a market maker broker or an NDD broker, or a hybrid broker, feel free to contact us and start as the big ones. If you wish a broker in, we have all the keys and tools to do it.

Rodrigo Insua

Avatar of Rodrigo Insua

Head of Marketing en Smartbrokersolutions. Coordination and management of online and offline marketing campaigns.

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