What a market maker is and why they exist
In forex, a market maker is a firm—often a bank or a broker—that continuously posts buy and sell prices for currency pairs and stands ready to transact at those quotes. Their job is to keep the market liquid so buyers and sellers can trade without having to find a direct counterparty. Without market makers, small trades could wait a long time for a match and markets would be much choppier.
Think of a market maker the way an airport currency booth operates. You hand over euros, the booth gives you dollars at a publicly posted rate, and later you can convert back at another posted rate. The booth takes on the risk of holding currency and earns from the difference between the buy and sell prices. In forex that difference is called the bid‑ask spread, and it is the basic way market makers are compensated for providing liquidity.
How market makers set prices and manage risk
Market makers set two prices for each currency pair: the bid (the price they will buy at) and the ask (the price they will sell at). The gap between those prices is the spread. That spread reflects several things: the market maker’s costs, their view of short‑term risk, the current liquidity of the pair, and competition from other liquidity providers.
Because market makers take the opposite side of client orders, they manage inventory risk. If they buy a lot of euros because customers are selling EUR/USD, they may hedge that exposure by trading with other banks, routing orders to an interbank pool, or using derivatives. During quiet times spreads tend to be tighter; during news or volatile sessions spreads widen because the market maker needs to be compensated for higher price risk.
Example: if a market maker quotes EUR/USD at 1.1000/1.1002, the 0.0002 difference (2 pips) is the spread. If many clients sell EUR at 1.1000, the market maker may temporarily hold that position or hedge in the interbank market; during a major economic release the same pair might be quoted at 1.0995/1.1008, reflecting a wider spread and higher risk.
Broker models: dealing desk (market maker) vs STP/ECN
Retail traders access forex through brokers that use different execution models. Some brokers operate a dealing desk and are themselves market makers: they set prices on the platform and may take the other side of client trades. Other brokers use straight‑through processing (STP) or electronic communications networks (ECNs) to pass orders to external liquidity providers, and those models typically show variable spreads and charge commissions.
The practical difference matters for execution. With a market‑maker broker your order is often filled instantly at the broker’s quote, which can be helpful when liquidity on the broader market is thin. That broker may hedge some flows externally, but because they can be the counterparty there is a potential conflict of interest. With an ECN/STP broker your order is routed to the best available price from multiple banks and LPs, which can produce tighter pricing at times but also means you may pay a commission and face variable spreads.
How market makers influence everyday trading
Market makers affect key trading factors: spreads, execution speed, slippage, and the likelihood of requotes or order rejection during volatility. For traders who make many tiny trades—scalpers—tight, stable spreads and fast execution matter a lot, so the choice of broker model can change expected costs. For longer‑term traders, occasional spread widening during news is less significant, but large slippage in illiquid conditions can still hurt.
Example: a scalper aiming for 3‑5 pips per trade needs consistently low spreads and reliable fills. If their broker widens the spread to 10 pips during a news release, a planned trade can become unprofitable instantly. Conversely, a swing trader holding a position for days is more sensitive to execution quality when the position is opened or closed than to tiny intraday spread moves.
Technology and strategies used by market makers
Modern market making uses algorithms and high‑speed quoting systems. Automated market makers adjust quotes based on incoming order flow, available liquidity, and market data. Institutional market makers often combine high‑frequency trading strategies, inventory hedging, and real‑time risk controls to manage large volumes and keep spreads competitive.
Some market makers use delta‑neutral or hedged strategies to reduce directional exposure, profiting mainly from the spread and from capturing microstructure opportunities. Others may employ simple inventory turns—buying at the bid and selling at the ask repeatedly—relying on volume rather than large per‑trade margins.
Risks and caveats for retail traders
Market makers provide an essential service, but there are caveats retail traders should understand. Because a dealing‑desk broker can be your counterparty, conflicts of interest may arise: a broker could be incentivized to execute in ways that favour the house. In regulated markets most brokers must publish execution policies and abide by best‑execution principles, but practices and oversight vary by jurisdiction.
During fast markets or major news, liquidity can dry up and spreads can spike, resulting in slippage, partial fills, or temporary inability to open or close positions. Platform outages or slow order processing during volatile events can also cause losses. Allegations of stop‑running or manipulative quoting occasionally surface; while regulation seeks to limit abuse, the retail trader should assume execution quality is not identical across all brokers.
Importantly, trading forex is risky and you can lose money. This article provides general information only and is not personalised trading advice. Always consider your risk tolerance and perform due diligence before choosing a broker or executing trades.
Practical checklist when evaluating market makers and brokers
When you compare brokers, focus on real execution characteristics rather than marketing claims. Look for transparent information about whether the broker is a market maker or an STP/ECN provider, how spreads and commissions are charged, whether order flow is hedged externally, historical reports on slippage and fill rates, and the regulatory framework the broker operates under. Demo accounts and small live test trades can help you observe real spreads and execution behaviour before committing larger capital.
Conclusion
Market makers are central to the functioning of the forex market: they supply liquidity, post continuous two‑way quotes, and help ensure you can buy and sell currencies without waiting for a direct counterparty. Their presence reduces transaction costs in many cases, but their quotes and the way they handle order flow can change quickly under stress. Understanding the role of market makers and the execution model your broker uses will help you set realistic expectations for costs, fills, and trade behaviour.
Key Takeaways
- Market makers post bid and ask prices and provide liquidity; they earn mainly from the bid‑ask spread.
- Broker models matter: dealing‑desk market makers, STP, and ECN providers behave differently and have different cost/execution trade‑offs.
- Spreads widen and liquidity can evaporate during volatile events; execution quality and slippage are practical risks.
- Trading carries risk; this is general information and not personal financial advice.
References
- https://pandats.com/news/mastering-market-maker-models-a-guide-for-brokers/
- https://www.babypips.com/forexpedia/market-maker
- https://www.pangea.io/learn/market-making
- https://solutionshub.epam.com/blog/post/market-maker-trading-strategy
- https://en.wikipedia.org/wiki/Market_maker
- https://www.investopedia.com/articles/forex/06/ecnmarketmaker.asp
- https://quadcode.com/blog/who-is-market-maker-and-how-does-it-work
- https://www.investopedia.com/terms/m/marketmaker.asp