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Written by Nathalie Okde
Fact checked by Rania Gule
Updated 16 April 2025
Market makers play a crucial role in keeping the market running smoothly by providing liquidity and ensuring that buy and sell orders are always matched.
If you’ve ever traded in the forex market, chances are you’ve come across this term ‘market maker’, but what does it actually mean?
In this article, we’ll break down what market makers do, how they earn profits, and how they impact your trades.
Market makers provide continuous liquidity and ensure smooth trade execution, especially in low-volume markets.
They profit from the bid-ask spread and use strategies like inventory management and quote shading.
Unlike brokers, market makers act as counterparties to client trades, which may raise conflict of interest concerns.
Understanding how market makers operate helps traders make informed decisions about broker types and trading strategies.
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A market maker is a financial entity or individual that provides continuous liquidity in financial markets, especially the forex market.
It consistently quotes both a buy price (bid) and a sell price (ask) for a financial asset, hoping to make a profit on the bid-ask spread.
Their main job? To ensure trades can happen smoothly, even when buyer or seller demand is low.
At its core, a forex market maker facilitates trades by taking the opposite side of a client’s order. If you buy EUR/USD, the market maker sells it to you. If you sell, they buy.
They maintain tight bid-ask spreads to keep markets efficient.
They reduce liquidity risk by always offering a counterparty.
They help stabilize prices by balancing order flow.
Market makers are always ready to buy or sell a currency pair at publicly quoted prices, and they profit by managing bid-ask spreads while balancing their exposure in the market.
Let’s break it down step by step.
A market maker continuously provides two prices for every forex currency pair:
Bid price: the price at which they will buy the base currency
Ask price: the price at which they will sell the base currency
The difference between these two is called the bid-ask spread, and it’s how market makers earn revenue.
For example:
EUR/USD bid: 1.1000
EUR/USD ask: 1.1002
The spread: 0.0002 (or 2 pips)
Whenever you place a trade, the market maker acts as your counterparty:
If you buy, the market maker sells to you.
If you sell, the market maker buys from you.
To keep the market moving, market makers must:
Constantly update bid/ask prices based on market conditions, news, and order flow
Absorb both buy and sell orders, regardless of supply and demand imbalances
Hedge their exposure through other positions or external liquidity providers to reduce risk
They are essentially the "house" in the trading game, ensuring that someone is always ready to take the other side of your trade.
Market makers don’t just pick prices randomly, they use real-time data and algorithms based on:
Global currency supply and demand
Trading volume and volatility
Economic news and announcements
Their own internal order book (client positions and net exposure)
This allows them to adjust spreads dynamically, widening them during high-risk periods (like news releases) and tightening them during calm market conditions.
Market makers are sometimes confused with other entities.
This is where many beginners get confused.
Market makers create a market. They trade against the client to maintain liquidity.
ECN/STP brokers (non-dealers) connect traders to the broader market without internalizing trades.
Market Maker vs. ECN Broker:
Feature
Market Maker
ECN Broker
Trade Execution
Internal
External liquidity pool
Bid-Ask Spread
Fixed or variable
Raw + commission
Conflict of Interest
Possible
Minimal
Slippage
Less common
More common
On stock exchanges, designated market makers (DMMs) are assigned specific stocks to manage.
In forex, this concept is more flexible, as market making is handled by brokers or banks without central assignments.
Market makers directly influence your trading experience by offering fast execution, stable spreads, and consistent liquidity.
Because they fill orders from their own inventory, trades are usually executed instantly, reducing slippage and delays. Their ability to maintain tight or fixed spreads, even during volatile conditions, makes trading costs more predictable.
Additionally, they ensure there's always a counterparty available, allowing you to enter or exit trades smoothly, even in low-volume markets. However, since market makers take the opposite side of your trade, a potential conflict of interest exists, especially with unregulated brokers.
Understanding these dynamics helps traders make informed decisions about broker choice and strategy.
While market makers have some influence over short-term price movements through their control of bid and ask quotes, true price manipulation is rare in regulated markets.
They may adjust spreads or quote prices slightly based on order flow or volatility, but they do not set market direction.
In heavily traded markets like forex and major stocks, competition and transparency make it difficult for any single market maker to manipulate prices significantly.
That said, in less liquid assets or during low-volume periods, pricing discrepancies can occur, which traders should be aware of.
Market makers in the forex market don’t just quote prices, they actively manage risk, liquidity, and profitability using sophisticated strategies.
Their goal isn’t to “beat” traders, but to earn consistent profits from the bid-ask spread while keeping the market balanced.
To do this, they rely on several core strategies designed to handle large volumes of trades, price fluctuations, and unpredictable order flow.
One of the most fundamental strategies is controlling the spread. Market makers set the bid and ask prices slightly apart, creating a spread they profit from.
They may widen the spread during high volatility or low liquidity to manage risk, and tighten it during stable conditions to stay competitive.
This real-time adjustment of spreads helps them maintain profitability without directly betting on market direction.
Market makers continuously manage their inventory of open positions. If they take on too many positions in one direction (e.g., too many traders are buying EUR/USD), they may:
Hedge their exposure in the interbank market
Adjust prices to encourage orders in the opposite direction
Temporarily widen spreads to slow down trading
The goal is to remain as neutral as possible to avoid losses from sharp market moves.
To reduce exposure or take advantage of order flow, market makers may use a technique called quote shading. This consists of slightly adjusting their bid or ask prices to attract trades in a preferred direction.
For example, if they anticipate downward pressure on a currency, they might quote a slightly lower bid to protect against losses or influence short-term price action.
This strategy subtly shifts pricing while maintaining a competitive spread.
Some institutional-level market makers engage in statistical arbitrage, where they exploit small pricing inefficiencies between related currency pairs or markets.
This involves high-speed trading and complex models, and while it's less common for retail brokers, it's a key strategy in institutional forex market making.
While these strategies aim to maintain market order and liquidity, they can also affect your trading experience, particularly in terms of spread fluctuations, slippage, or execution speed.
Recognizing these tactics helps traders understand price behavior and avoid false signals during key trading moments.
A market taker is a trader who accepts the current market price by placing an order at the existing bid or ask. Unlike market makers who provide liquidity, market takers consume it.
Most retail traders are market takers, they buy at the ask and sell at the bid, paying the spread in the process.
This model allows for fast execution but comes at a cost, especially when spreads are wide or volatility is high.
Market makers have their own advantages and disadvantages.
High liquidity: Orders are filled quickly, even in low-volume periods.
Tight spreads: Especially during stable market conditions.
Stability: They absorb excess order flow and prevent extreme volatility.
Access: Ideal for beginner traders due to predictable conditions.
Potential conflict of interest: They may benefit from your losses.
Price shading: Slight adjustments to quotes that may not favor the trader.
No direct access to interbank prices: Unlike ECN environments.
Market makers play a critical role in ensuring the smooth operation of the forex market.
They provide essential liquidity, keep trading costs manageable through narrow bid-ask spreads, and help maintain market efficiency.
Whether you're trading with a forex market maker or a broker, understanding how your trades are executed can shape your strategy and profitability.
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Market makers provide continuous liquidity by quoting buy and sell prices, ensuring that trades can be executed instantly without needing a matching counterparty.
They reduce liquidity risk by always standing ready to buy or sell, even in quiet or volatile markets.
Potential conflicts of interest and spread manipulation are common concerns, though regulation and transparency reduce these risks.
While minor price influence is possible, manipulation is generally rare in regulated environments due to competition, volume, and oversight.
SEO Content Writer
Nathalie Okde is an SEO content writer with nearly two years of experience, specializing in educational finance and trading content. Nathalie combines analytical thinking with a passion for writing to make complex financial topics accessible and engaging for readers.
Market Analyst
A market analyst and member of the Research Team for the Arab region at XS.com, with diplomas in business management and market economics. Since 2006, she has specialized in technical, fundamental, and economic analysis of financial markets. Known for her economic reports and analyses, she covers financial assets, market news, and company evaluations. She has managed finance departments in brokerage firms, supervised master's theses, and developed professional analysis tools.
This written/visual material is comprised of personal opinions and ideas and may not reflect those of the Company. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. XS, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same. Our platform may not offer all the products or services mentioned.
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