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What is Market maker and how do they make money??

  • March 12, 2019
  • admin
  • Forex business

The name is largely self-explanatory. A market-maker is typically defined as a broker-dealer firm that publicly quotes both a buy and sell price for a currency or commodity that is traded on a regular and continuous basis .A market maker quotes two-way prices in a certain currency pair, thereby making a market. A Forex market maker essentially does three things:

  Sets bid and offer prices within a certain currency pair

  Commits to accepting deals at these prices within certain constraints

  Takes the resulting exposure on to their own book (at least initially)

Market makers must be compensated for the risk they take. What risks? What if he buys your shares of common stock in IBM then IBM's stock price begins to fall before a willing buyer has purchased the shares? To prevent this, the market maker maintains a spread on each stock he covers. Using our previous example, the market maker may purchase your shares of IBM from you for $100 each (the ask price) and then offer to sell them to a buyer at $100.05 (the bid price). The difference between the ask and bid price is only $.05, but by trading millions of shares a day, he's managed to pocket a significant chunk of change to offset his risk.