Those who have recently started bidding in the Forex market are first of all looking for good training programs for themselves and watching kilometers of video. Unfortunately, not all of them form the correct idea of the market functioning mechanism. So, many trading gurus impose the idea that the market maker is the main rival of the trader, who strives to take away all his profit and capital. Is it really? Let's try to figure out what happens when we create a new Buy or Sell order.
Market Maker is ... Definition
By definition, a market maker is a kind of financial structure whose primary responsibility is to provide liquidity in the market. This role is usually played by large or national banks, as well as brokerage companies, which are strictly subject to the established financial legislation. Literally, a "market maker" is a "market maker." And in fact, it is so, because without a sufficient liquidity, no market can exist.
The functions of the main participant in the Forex market
If the main task of large brokers and banks is to provide liquidity for exchange transactions, then, based on this, their functions are determined. If there is a shortage of a certain type of currency, MM is obliged to go to other liquidity providers. For this, the orders of his clients for the purchase of a certain currency are displayed at the interbank level. The same thing is done if MM does not want to bear the risks of currency transactions involving own money.
If there is no liquidity on the market, that is, there are no counterparties wishing to conduct a reverse transaction, for example, to sell the currency that a bank client wants to buy, then this financial structure is obliged to provide cash from its own reserves or independently make a reverse transaction at the international level.
The main market participants
The influence of market makers has grown dramatically since the emergence of the international Forex market with its huge turnover, which, according to very rough estimates, covers contracts worth about $ 5 trillion a day. The lion's share of all operations is accounted for by large participants. We can say that the market maker is the main participant in the Forex market, without which there would be no market.
It is a mistake to think that there is someone invisible on the market who pulls the strings sitting somewhere up there. In fact, there are many Forex market makers who regulate individual markets for a particular currency. For example, the American Citybank has a huge impact on the US dollar, with trading volumes exceeding those of all other similar institutions. The German Deutsche Bank is a little behind, followed by English RBS and Swiss UBS. These four banks provide 50% of all trade on the international currency exchange.
Interbank Trading
None of the ordinary traders are able to enter the interbank market on their own, because the standard pool there is $ 5 million. Even not many banks are able to invest such an amount in trade. Therefore, large prime brokers collect several such applications to process one large order on the interbank market. A prime broker means an organization that has direct access to the interbank level. At a lower level are retail brokers who are intermediaries between private small traders or organizations wishing to buy foreign currency and large prime brokers.
Profit Retail Broker
Brokers are divided into two categories: A-brokers or working according to the A-Book scheme, and B-brokers working according to the B-Book scheme.
In the first case, all transactions of broker's clients go through the interbank market, and the broker is only an intermediary. His profit in this scheme is the commission for the main spread. The more successful the operation, the more profitable it is for the broker who works according to scheme A. That is, he will be interested in the success of his traders.
The situation is different where the process is organized according to scheme B. Here, the vast majority of transactions are made inside the brokerage office, therefore the main profit is the loss of the client. Such brokers are also called dealing centers, and in the post-Soviet space - “kitchens”.
Big money
In order to better understand the market and successfully trade on it, many experienced traders recommend understanding the market maker strategy. In how he acts and why. For example, it is a widespread misconception that a market maker almost specifically hunts for money from small traders in order to take it away. This is so, and not so at the same time, even when it comes to “kitchen”. After all, a retail broker cannot independently change quotes, and real big money is occupied by another - providing liquidity for its customers.
In fact, it is important for MM to obtain this liquidity in any way possible and, preferably, with minimal effort, that is, without a sharp change in price. And if in some place applications for opening or closing market orders have accumulated, the main market participant will definitely go there to receive additional cash, which he does not have enough to execute counter orders. That’s why it’s important to understand who market makers are and how they trade.
How to predict the actions of a market maker
Looking at the price chart, experienced traders are able to calculate the balance of forces and determine who is more on the market, buyers or sellers. Depending on this, it is not difficult to predict further actions of the so-called "big money". In order not to be eaten by the monsters of the market, you need to be able to adjust, take the direction of the price movement, which is currently beneficial for the market maker. And in time to get up with him in the same direction.
This is the so-called trading with a market maker. Those who have learned to think like MM and predict its future actions are always in the black. It is important to understand that these financial institutions do not aim to manipulate prices in order to withdraw your money. Their main function is to ensure the liquidity of an asset. And the market maker acts strictly in accordance with his tasks. And the fact that small traders fall under his rink is the result of their own carelessness, carelessness or frivolous attitude to the market.