Have you ever wondered how you can buy or sell currency pairs in forex at any given time? Forex is a market that changes non-stop for 5 days days a week. Despite being a global event, the probability of finding a merchant willing to make a trade in the currency pairs of our choice at any given point in time is very small. And yet, every trade in forex is complete in a matter of seconds. This happens due to the functioning of the foreign exchange market making.
A market maker is a mediator, whose job it is to create a virtual market for the trader. At the time that a purchase order/sale, the market maker carries out the trade, regardless of their own loss or gain. In forex, the list of creators of the market is composed of investment banks, central banks, commercial banks and large brokerage firms. These institutions are always ready with a fixed bid and the sale price. A market-maker offers services in both rising and falling market scenarios.
How does a Market Maker Generate Profit?
There is nothing as a free service in the world. The market maker must obtain some of the facilities on offer. Make money:
- Buy the securities at a price lower than its selling price.
- The sale of the securities at a higher price than the purchase price.
Therefore, in summary, we can say that makers of market, make money by taking advantage of the difference between the bid and offer prices. This bid/offer spread depends on the liquidity of the market and the size of the transaction.
Why do we Need Market Makers in Forex?
The market makers in forex ensure that the trade floor is always functional. They constantly update their bid/offer spread (twice in a minute), in accordance with the market updates. This helps on two fronts. In the first place, the operator has a precise overview of the market for decision making. Secondly, this ensures market liquidity and efficiency of currency pairs. This is the form of marketing solution that has ensured the 24-hour trading system of forex.
With the arrival of the foreign exchange market, politicians, actors, such as large multinational companies and registered money brokers, have started locking horns with the likes of the big investment banks in the field of forex trading. Some of the most famous forex market makers are CMS Forex, Forex Capital Markets and Gain Capital. All of these are regulated and managed by the Commodity Futures Trading Commission of the united states.