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  • Writer's pictureJonathan Lou Reyes

Market Makers - Nefarious institutions or not really?

The term "market maker" has often been received as something negative. There is a common misconception that they are the evil in the financial industry that is out to take every dollar in your trading account. Let's back up a bit and understand what market makers are, what they really do, and why they are perceived as such.

So what are market makers and what do they do? Market makers provide liquidity in the market. Basically, that allows us to buy and sell any of the offered financial assets like stocks, forex, etc. Alternatively, they are also called liquidity providers or LPs. These LPs are responsible for taking the other side of your trade for a fee either as part of the spread or commission. This allows us instant execution for our trade orders. For example, you'd like to buy 100,000 EUR. That can be executed in less than a second thanks to the LPs. They are the ones who sold it to you. On the other hand, let's say you already have some profit and would like to close the trade. That too will be executed instantly because the LP again took the other side of the trade. Initially, we think that when we buy or sell assets, the broker finds someone who's taking the opposite trade. However, that may take a very long time to coordinate, and you may not get the price that was initially offered, so that’s where LPs come in handy. In general, they significantly improve trading conditions and make trading possible for us.

So why all the fuss about them being evil? If they follow all the proper regulations and practices, there's no problem. However, it's possible that it isn't always the case. There is criticism that LPs can manipulate prices to some degree by placing trades ahead of others, widening the spread, etc. These movements can be in their favor. In addition, there is a certain amount of capital that should be in reserve to efficiently execute the trades in case of extreme volatility in the market. Whether or not they do keep it in reserve is information that we won't have access to.

In conclusion, market makers are the ones who make retail trading possible. They are deemed as something good and essential in the market. Nevertheless, we should stick to trading with good brokers who get quotes from quality liquidity providers. No need to worry much on that since PAFTI brokers are already reliable and trustworthy.

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