There are many Forex brokerage companies that might confuse you when you are starting out as a Forex trader. All of these Forex brokerage companies are categorized into two main groups; the ECN broker and the market maker Forex brokers. In this article, we will focus on market makers Forex brokers but you can choose either one of them.
What is a forex market maker?
Market Maker Forex brokers refers to a firm that is authorized to produce and retain a market in a particular financial instrument. The market makers are allowed to quote, buy and also sell financial commodities . Their revenues are made on the slight differences between the offer and the bid spreads. They are compensated because they preserve liquidity and thus creating efficiency in that particular financial instrument.
Why are they important?
When you are placing an order, the transaction that you see is not as simple as it looks. You might be through in a blink of an eye but behind everything, the market maker does all the work of matching the seller and the buyer, and vice versa. Without the broker , it would be difficult for a seller or a buyer to get the same exact shares. Forex market makers buy huge amounts of shares from sellers even when they don’t have a buyer so as to quicken the transaction if you happen to place an order with them. The problem is that by doing so , market maker Forex market makers risk a large amount of money that they stand to lose if the prices fall while they still hold the shares.
They avoid this from happening by maintaining the spread which can be a difference of $0.05 between the ask price and the bid. They provide extra liquidity that allows a better trading experience . When choosing a Forex market maker , you should first be certain that they are regulated by an approved official organization. There are a lot of Forex brokers but you can eliminate scams by doing a little internet research . Note that, market makers do not charge a fee for their services since they make their profits from the difference between the ask price and the bid.
Advantages of Market Makers
• When an trader places an order to buy a currency which nobody wants to sell, market makers sell that currency to that trader from their own funds .
• The prices of this type of broker are less volatile and smoother than ECN
• You can open an with only few hundred dollars because most of Forex market makers provide micro or a mini Forex trading account.
Disadvantages of Market Makers
• There is a possibility that they might trade against you
• There are some that will not allow you to scalp .
• If they cannot match the display price on the ECN, you will not get it.
In conclusion:
The Forex market cannot be the same without Market maker Forex brokers and this one reason why you should take your time when choosing one. Spreads are very important because these are what makes the difference between profits and losses. A market maker may has a bit higher spread than STP or ECN brokers, however, they maintain the same spread all the time. At a STP broker, you might get higher spread on news releases or such event, so choose wisely.
Check out the details of a responsible market maker broker on Master Forex review. Check out four ways to get quick profit from the forex market on day trading rules.