Market maker
Also known as: dealing desk, dealing desk broker, market maker broker
Market maker: A market maker broker, also called a dealing desk broker, quotes its own bid and ask prices and acts as the counterparty to client trades instead of passing every order to outside liquidity providers.
How does a market maker broker work?
When a client buys, the market maker sells to them, and the broker’s position is the opposite of the client’s. The broker may keep that exposure, offset it against other clients’ trades, or hedge part of it with liquidity providers. Market makers often offer fixed or commission-free spreads, and with instant execution they may requote orders.
What is the conflict of interest?
Because the broker can be on the other side of the trade, a client’s loss can be the broker’s gain. The CFTC’s customer advisory on forex lists this among the points customers should understand. Regulated market makers are subject to rules on fair pricing and order execution, and the order execution policy describes how prices are set: how to choose a forex broker.
Worked example
Illustrative only: a client buys 1 lot of EUR/USD at the broker’s ask of 1.0852. The broker sells that lot to the client from its own book. If the price later falls, the client’s loss offsets the broker’s gain on the short side, unless the broker has hedged the position elsewhere.
Sources
- Customer Advisory: Eight Things You Should Know Before Trading Forex, Commodity Futures Trading Commission
Learn more
- How to Choose a Forex Broker: A Checklist
How to choose a forex broker: regulation, client money protection, total trading costs, order execution, platforms and withdrawal terms, with a checklist.
- Bid and Ask Price in Forex: What They Mean and Which You Pay
What is the bid and ask price in forex? Which price you buy and sell at, how to read a quote, the spread, the mid price and why charts show the bid.
Related terms
- STP broker
An STP (straight through processing) broker passes client orders to one or more external liquidity providers, such as banks, instead of taking the other side of the trades itself.
- ECN broker
An ECN (electronic communication network) broker routes client orders to an electronic network where prices from several liquidity providers and participants meet, typically charging raw spreads plus a separate commission.
- Requote
A requote happens when the price changes before an order is filled and the broker, instead of filling it at the requested price, offers a new price that the trader can accept or reject.
- Spread
The spread is the difference between the bid (sell) price and the ask (buy) price of a currency pair. It is one of the main trading costs and is usually measured in pips.