In general, there are two main groups in the Forex marketplace:
Hedgers account for less than 5% of the market, but are the key reason
futures and other such financial instruments exist. The group using these
hedging tools is primarily businesses and other organizations participating in
international trade. Their goal is to diminish or neutralize the impact of
This group includes private individuals and corporations, public entities,
banks, etc. They participate in the Forex market in order to create profit,
taking advantage of the fluctuations of interest rates and exchange rates.
The activity of this group is responsible for the high liquidity of the Forex
market. They conduct their trading by using leveraged investing, making it a
financially efficient source for earning.
Since most Forex deals are made by (individual and organizational) traders, in
conjunction with market makers, it's important to understand the role of the
market maker in the Forex industry.
Questions and answers about 'market making'
A market maker is the counterpart to the client. The Market Maker does not
operate as an intermediary or trustee. A Market Maker performs the hedging
of its clients' positions according to its policy, which includes offsetting
various clients' positions, and hedging via liquidity providers (banks) and its
equity capital, at its discretion.
Banks, for example, or trading platforms (such as Easy-ForexT), who buy and
sell financial instruments "make the market". That is contrary to
intermediaries, which represent clients, basing their income on commission.
By definition, a market maker is the counterpart to all its clients' positions,
and always offers a two-sided quote (two rates: BUY and SELL). Therefore,
there is nothing personal between the market maker and the customer.
Generally, market makers regard all of the positions of their clients as a
whole. They offset between clients' opposite positions, and hedge their net
exposure according to their risk management policies and the guidelines of
Market makers are not intermediaries, portfolio managers, or advisors, who
represent customers (while earning commission). Instead, they buy and sell
currencies to the customer, in this case the trader. By definition, the market
maker always provides a two-sided quote (the sell and the buy price), and
thus is indifferent in regards to the intention of the trader. Banks do that, as
do merchants in the markets, who both buy from, and sell to, their
customers. The relationship between the trader (the customer) and the
market maker (the bank; the trading platform; Easy-ForexT; etc.) is simply
based on the fundamental market forces of supply and demand.
Definitely not, because the Forex market is the nearest thing to a "perfect
market" (as defined by economic theory) in which no single participant is
powerful enough to push prices in a specific direction. This is the biggest
market in the world today, with daily volumes reaching 3 trillion dollars. No
market maker is in a position to effectively manipulate the market.
The major source of earnings for market makers is the spread between the bid
and the ask prices. Easy-ForexT Trading Platform, for instance, maintains
neutrality regarding the direction of any or all deals made by its traders; it
earns its income from the spread.
The way most market makers hedge their exposure is to hedge in bulk. They
aggregate all client positions and pass some, or all, of their net risk to their
liquidity providers. Easy-ForexT, for example, hedges its exposure in this
fashion, in accordance with its risk management policy and legal
For liquidity, Easy-ForexT works in cooperation with world's leading banks
providing liquidity to the Forex industry: UBS (Switzerland) and RBS (Royal
Bank of Scotland).