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Chapter 3, Part II. Participants, participants… Page 4

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 14, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Market makers are quite different companies, although there is not much different with FX brokers at first look. They typically act as principal in the transaction versus the retail customer, and quote a price they are willing to deal at—the customer has the choice whether or not to trade at that price. They do not usually charge any additional fee except for the bid/ask spread that we’ve discussed already in previous chapter. Although this spread may be as small as 0.0002-0.0005, a market maker still can get a significant profit due to large amount of transactions with their customers. In fact, roughly speaking, market makers break their own one big trade with large bank on the one side, into many small trades with small customers (individuals) from another side. And without this type of transaction, it would be very difficult to for most individuals to trade FOREX.

    In assessing the suitability of an FX trading service, the customer should clearly understand the difference of whether the service provider is acting as principal (Market maker) or agent (Broker). When the service provider acts as agent, the customer is generally assured of a known cost above the best inter-dealer FX rate. When the service provider acts as principal, no commission is paid, but the price offered may not be the best available in the market—since the service provider is taking the other side of the transaction, a conflict of interest may occur.

    Currently, FX Market Makers usually have wider spreads, especially in the retail segment of FX business that primarily deals with individuals.
     
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