By: Charley Warady
Just about any broker you may find on the Internet would be considered a Forex market maker. The term comes from exactly what they do. They make the market. When you put in an order with a broker, it doesn't go out on a trading floor, per se'. It stays on the Internet.
By definition of the term, the Forex market maker is on the other side of your trade. If you are the buyer, he is the seller. If you are the seller, he is the buyer. Once all the buy orders are exhausted at any particular price, the market will move. The Forex market maker is still guided by the number of buy and sell orders in any particular Forex pair. They can't skip around.
Conflict of interest?
At first glance, it might seem like the Forex market maker is operating in a conflict of interest. After all, they are not matching up buy and sell orders from individual traders; they are taking the opposite sides of the trade.
However, in order to create an even flow of volume and trends, the system seems to work out. Contrary to popular belief, the vast majority of Forex brokers are not working against their traders. They actually become the Forex market maker to help them and keep them in the market. It's not good policy to blow out your traders. It certainly doesn't lead to longevity for the broker if that's what he does.
Traders who trade through a Forex market maker get added benefits. Most brokers provide online live charts; technical analysis; market news; and some even give educational tutorials.
A seasoned trader might not want or need any of the things a Forex market maker provides and prefers to trade with the commercial industries. That's where an ECN broker comes in. There is a commission involved and the quantities traded must be larger. The volatility is higher in price fluctuation; so it is definitely not for the novice.
There are advantages and disadvantages to both methods of trading. But that can be said about anything. To label a Forex market maker any particular way is leaving it short. There are a lot of traders out there making a very good living this way, and they're very happy with the market the way it is.
Is there room for improvement? Absolutely. With the CFTC regulation and other regulatory commissions keeping a close watch on the Forex market, it will only get better. But with trillions of dollars being traded daily, the market is doing pretty well as it is.
No one is doing it for a philanthropic exercise and the brokers who act as a Forex market maker are certainly out to make money themselves. But in order for them to continue they have to make the markets attractive to the traders participating, and it will continue to do so. So, although it is still a long way from a perfect system, the system does allow for some great trading and great opportunities.