Broker Execution Types Market Maker

As you may know, there are a few different types of brokers in the retail foreign exchange market including Market Maker, ECN, STP and etc. The criteria we talked about here is the order execution type, basically, how a order will be executed after you placed one through your Electronic Trading Platform, Telephone or other methods. Each execution type has its own advantages as well as disadvantages comparing with other types. In this article, we are only focusing on Market Maker brokers. Please check other articles if you would like to know the feature of other type brokers.

Market Maker brokers normally have an in-house dealing desk. Dealing desk means there are many traders seating in front of a computer or many computer to monitoring each order their client placed. Just like the picture below:

Since Market makers control prices, so it typically offers fixed spreads and may elect to quote above or below actual market prices at any time. Market makers are always the counterparty of the trader, who doesn't trade directly with the liquidity providers. Market makers get paid through the spreads, and they usually also take the opposite trades of their clients prior to covering themselves (or not) with regards to the liquidity providers.

The following graph shows the word flow of a Market Maker Broker:


Let's say you place a buy order for GBP/USD for 1 lot (i.e. 100,000 units) with your Dealing Desk broker. To fill you, your broker will first try to find a matching sell order from its other clients or pass your trades on to its liquidity provider, i.e. a sizable entity that readily buys or sells a financial asset.

By doing this, they minimize risk, as they earn from the spread without taking the opposite side of your trade. However, in the event that there are no matching orders, they will have to take the opposite side of your trade. Take note that different brokers have different risk management policies, so check with your broker regarding this.

Advantages:

  • The trading platform usually comes with free charting software and news feeds

  • Currency Price movements can be less volatile, compared to currency prices quoted on ECNs

  • Normally, you can have fixed spread and guarantee stop.


Disadvantages:

  • Market makers can present a clear conflict of interest in order execution, because they may trade against you

  • They may display worse bid/ask prices than what you could get from another market maker or ECN

  • Market Maker may move their currency quotes 10 to 15 pips away from other market rates

  • A huge amount of slippage can occur when news is released. Market Maker’s quote display and order placing systems may also freeze during times of high market volatility

  • Some Market Makers frown on scalping practices and have a tendency to put scalpers on "manual execution," which means their orders may not get filled at the prices they want.


Market Makers make profit on spreads and by hedging against their clients (i.e. take the opposite position as clients). Therefore, if a client becomes very profitable, it means the broker is losing money. While this may be tolerated and professionally managed by a larger reputable market maker, with a smaller dealer such client will be soon asked to leave.

Please find out all the Market Marker brokers by clicking Here

Article Source: www.findyourfx.com

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