Forex Market Makers

Written by Jacey Harmon
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By far the Forex market--foreign exchange or FX market--is the largest market in the world. Its daily turnover of nearly $1.5 trillion translates into a $200 transaction for every man, woman and child on earth, every business day. The size and depth of this market is very impressive. It's common to see single transactions totaling $200 million or more. Prices can change as many as 20 times a minute. Heavily traded currencies can see their prices change 18,000 times a day.

Market Makers in the Forex Market

In order for the Forex market to operate, or any market for that matter, you need a market maker. A market maker is designated to maintain a market for a specific currency. They will buy if their client wants to sell and sell if their client wants to buy. They receive buy and sell orders throughout the session and maintain the price accordingly. If there is an influx of buy orders, the market maker simply raises the price until sellers start to sell.

Market makers make their money on the spread between the bid price and asking price. The spread is often very small-in the case of major currencies as little as $.0003/unit-but when you figure how many trades they process, they can earn a significant amount of money. Being a market maker isn't without risk, however. Market makers need to maintain an inventory, which when depleted they will need to buy more from other market makers.

Most market makers are large financial institutions like commercial or investment banks. It is estimated there are over 200 market making banks across the globe. Great Britain--which accounts for 38 percent of the activity in the Forex market--reported 213 foreign exchange dealer institutions in 1998. That is considerably higher than the 93 reported dealer institutions in the United States. London's location allows its trading session to overlap with both Asian and American markets. In fact, there are more dollars being exchanged in London than the United States.


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