I receive many emails and messages asking about brokers. Usually the sender would like to know what brokers I recommend, fairly often I also receive concerns and questions about the integrity of Forex brokers and market makers. Hopefully this post will answer some of the questions you may have...
What is a market maker?
The term market maker is used loosely and can usually refer to many things. Traditionally, a market maker is a broker that buys financial assets and securities and then sells them on to clients at a premium (spread). Recently, market makers are brokers that 'make markets', they offer derivative products, usually in the form of options, CFDs and spread bets.
So, are CFD providers market makers?
Yes. CFDs are not traded on an exchange, CFD brokers create or make a CFD market for it's clients to buy and sell. CFDs usually mirror the underlying asset. This is also true for non-exchange options and spread betting providers.
Does my market maker broker trade against me?
Yes but there is no conflict of interest. Market makers will take the other side of client positions but this is totally expected, most clients will lose, taking the winning side of client trades is common sense and is a big earner. Market makers are not actively looking to stop you out though, if you are a profitable trader there are other models and techniques market makers will use to earn revenue.
How does a market maker make money? How do CFD brokers make money?
As mentioned above, one of the ways a market maker earns revenue is through taking the other side of client positions. Another model that provides revenue is matching client positions against each other and profiting from the spread. If you are a profitable trader, you broker may look to match your positions against other client positions. A market maker may also enter the exchange and buy or sell the underlying asset to hedge against your position (acting like a more traditional market maker). Revenues are also earned through fee and charges.
Watch my video below, it will provide further insights.