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Forex market players – market makers

For those of you familiar with trading equities, the term market maker may mean something completely different, and indeed those of you who have visited some of my other sites, will also know of my views on another group of pariahs, who feed off the central exchanges daily and purport to be innocent of insider dealing and price manipulation, all under the auspices of the FSA.  I must be sounding very cynical, but it’s not meant to be, just a statement of fact about what goes on in the financial markets every day, whatever instrument you happen to be trading!

In the context of $orex marketever, market makers are a very different group, and are often referred to as dealers or brokers, and in simple terms there are two types, namely institutional market makers and retail market makers. They are the only group of forex market players who are not direct clients within the interbank market, but who simply provide a service to their clients.  The institutional market maker is generally another bank or large institution, who provide quotes to other smaller banks, large corporations, or even smaller retail market makers, setting their own bid and ask prices based on the data feeds they obtain from the interbank pool created by the central banks. The retail market maker on the other hand is generally a company that quotes forex rates to the public or retail trader – you and me in other words, and this is the group that you are likely to use for your $orex demoount, as well as your live trading account. However, before you rush off, read on, as all market makers or forex brokers are not the same – indeed far from it!

All market makers however, have one thing in common, which is as the counter-party to each and every trade, they are obliged to take an equal and opposite position every time you trade. So whenever you open a sell order, they must buy from you, and whenever you buy then they must sell, which is where the problem lies, as this offers the market maker two options with your trading position. Firstly, he can hedge the position in another market, so that the company is protected, and indeed this is a standard type of $orex tradingategy which I use all the time, and is a perfectly legitimate way of protecting positions, whether as a forex trader, or as a market maker. The second option for the market maker is to trade against, you creating a clear conflict of interest, and all manner of opportunities for the market maker to manipulate your quotes, and to make sure that your trades lose most of the time, with stops being hit, slow execution, unexpected system errors, and unexplained spikes in the forex quotes being provided. Although a market makers role should theoretically be limited to creating a market for its clients, and simply passing off the risk to third parties, the lure of money is too much for most, as trading against their clients is far more profitable, generating significant profits for the company along the way. Indeed most retail traders are so good at being on the wrong side of the market most of the time, that all market makers view their clients as an excellent contrarian indicator of which way the market is likely to move, and then trade against their clients accordingly. These clients are usually referred to as the B book, in other words the cannon fodder which forms the bulk of most retail market makers clients, and in general they will have several things in common. First, they have an unnering knack of picking the turning points on a forex chart and then trading in the opposite direction – trading short when the market turns higher, or trading long when the market turns lower. So if you can find a market maker who publishes their client sentiment data, then simply trade in the opposite direction and you will do better then most. Secondly, they are all small accounts with a maximum of $2,000. Third, they are almost always wrong in their trading decisions, and finally they are generally wiped out in a few weeks, forcing the market maker to find some fresh blood to top up his B book list. The A book clients are those that survive and are able to make money – these are treated with some respect!

Once we get deeper into the subject I will explain all the tricks of the market makers, but for now, at least, you have a passing understanding of this group of forex market players. For now let’s look at another group, this time the speculators I mentioned earlier, of which you will be one ( albeit a small one!).