Trading foreign currencies has garnered enormous popularity across the globe over the past decade. In previous times, individual retail forex traders were few and far between. The forex arena was the private playground of major global banks, commingled funds, and those individuals with the wherewithal and financial resources to trade very large lot sizes. Average transactions in those days were for $1 million positions and up, not exactly an environment that fostered the retail trading frenzy that exists today.

See a complete list of forex brokers.

What happened to change things? Forex brokers saw an opportunity and did what brokers do – provide access to a market for clients by providing reasonable terms that are both acceptable and convenient. Their chosen activity, however, was not exactly like a market maker in the stock world. They were not selling title to an actual asset where ownership issues were involved. Their job was to provide Bid/Ask quotes, and, as with stocks, be prepared to be the buyer or seller of last resort, if the market liquidity became an issue.

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    Market liquidity in the forex world, however, is never an issue, at least for major currency pairs. At a daily turnover rate in excess of $4 trillion, the forex market is the largest and most liquid market in the world. No market maker in this arena would ever have to worry about building an inventory of unsold shares and then wait for the opportune time to unload them on the market.

    The forex market maker actually buys and sells his own positions in the background from chosen liquidity providers in the Interbank market, and then offers positions at Bid/Ask prices that work to his benefit. As a middleman, the broker deals with banks or other brokers on one end, while managing the “over/unders” for each currency pair from retail traders on an aggregated basis. In other words, there remains a basic conflict of interest for all market makers. Unscrupulous brokers can easily manipulate spreads to their benefit over time, leaving their clients to accept their behavior or move on.

    The market makers in the forex community of brokers, at least the vast majority of them, are legitimate and would never do anything like manipulating spreads to their immediate benefit. They are more concerned about pleasing and retaining their clients. Competition is too fierce, and regulators provide much more oversight in this day and age. Like it or not, however, ECNs, the other type of broker that passes orders straight through to their liquidity providers, waste little time in their marketing campaigns emphasizing that market makers trade against their clients in the back-office. There are pros and cons for each broker set up, and these depend on what your individual needs happen to be.

    What exactly is a forex market maker broker?

    Here is one definition of a forex market maker:

    “A broker-dealer firm that accepts the risk of holding a certain number of forex positions on its books for a particular currency pair in order to facilitate trading in that currency pair. Each market maker competes for customer order flow by displaying buy and sell quotations that it will honor if acted upon in a timely manner. Once an order is received, the market maker typically aggregates its net positions and immediately places an offsetting order in the market with its liquidity provider. This process takes place in mere seconds.”

    In other words, a market maker does exactly what the term implies – it makes a market for the applicable currency pair, often without going to any trading floor or electronic exchange. Nearly all forex brokers operate in this fashion for retail forex trading.

    The opposing type of broker, the ECN or “Electronic Communication Network” uses a special set of financial software protocols to link up with a host of large liquidity providers and funnel the orders directly through, posting only the Bid/Ask spreads that are provided to it. Variable spreads and commissions, however, can be confusing, and this trading modality is designed more for commercial, institutional, and large balanced professional traders. It is not for novice traders focused on small positions. It is comprised of high volume trades with high transactional values. If you want to start trading with an ECN broker we recommend FXPro. Open a demo account here or read the FXPro review.

    How do you recognize an unscrupulous forex market maker?

    All forex traders should be constantly on the lookout for the tell-tale signs of fraudulent business practices. Manipulating Bid/Ask spreads is one of the more common abuses. It serves as a hint that you should be skeptical and beware. Constant re-quotes or “slippage”, the practice where your execution occurs at a different rate than what you expected, are emblematic that a broker may not be on the up. Also, if you see a flat market, then a sudden swing of 25 or 30 pips to sweep away stop loss orders, and then a return to the previous level, the broker may once again be guilty of poor business practices. Read more about questionable forex broker practices here.

    What are the pros and cons for forex market makers?

    Pros:

    • Market makers provide a wealth of support in the form of online live charts, technical analysis, market news and commentary, and a variety of educational materials from ebooks to online tutorials;
    • More user-friendly and popular trading platforms like Metatrader4 are available and supported;
    • Spreads are fixed, not variable, and no commissions are applied;
    • Volatility can be somewhat lower, as the market maker tries to stabilize the view of the market for the trader.

    Cons:

    • Manipulations may occur in the form of re-quotes, slippage, and sudden moves to clear stop loss orders;
    • Spreads may not be as tight, as with an ECN;
    • Servers may freeze up when major news releases occur, causing more slippage;
    • Limitations may apply for scalping strategies, EAs, and automated trading.

    Concluding Remarks

    If you want to act like a “heavy-hitting” professional trader, then a market maker may not be the best fit for you. Most brokers are, however, of this genre, and it is unfair to label the majority as always trading against you. If you are a novice or like to trade smaller lots, then a market maker may be best. ECNs may be the wave of the future, but they may not be suited for everyone’s trading needs or approach.