The simple definition of a market maker is an organisation that provides trading services for an investor. Market makers boost market size and liquidity by providing bids and offers for securities. This guide will explain how the market-making game works and how to find the best market maker broker in 2023.
How Market Makers Work
Market makers are firms or companies that provide bids and offers of a two-sided market along with the market size of each. They set both the bid and ask prices on their system and display them publicly on quote screens. All trades are recorded in the order book. As an example, a broker may quote GameStop stocks at $160.00 – $160.05, 100 x 500. This means that they will buy 100 shares for $160.00 and sell 500 shares at $160.05. You can find market makers in all markets, including stocks, cryptos like Bitcoin, forex, plus for options and ETFs.
An E-market maker (electronic market maker) is a firm that provides prices on electronic trading (e-trading) venues and submits limit orders to buy or to sell.
A market maker’s method for taking profit is through the asset spread.
These brokers establish the bid and ask prices of an asset and trade on both sides of the market, making their money through the difference in prices. Market makers set the bid price slightly lower than market value and the ask price slightly higher. Brokers compete by setting the tightest spreads, meaning liquidity is provided to the markets and spreads are kept reasonable for retail investors in the dealer market. The people on the other side of the trade, who fill the orders made by market makers, are known as market takers.
The market maker weekly cycle represents some key phases of the business model. These phases are the first trap move, the accumulation phase, the planned market move and the markdown phase. During this time, brokers will try and lower the price of an asset to the level of their client’s stop-loss order. This is known as stop hunting and generally happens weekly. However, not all market makers follow such a predatory approach. 
Make sure you don’t confuse market makers with market maker bots, which are high-frequency trading software to increase liquidity in the crypto market. There are also bots available on GitHub or GunBot for use on platforms such as Market Maker 4 BitMex.
A market maker of last resort (MMLR) is another realisation of the same philosophy.
This describes exceptional market intervention by a central bank to improve the liquidity of a market whose lack thereof poses a threat to financial stability.
Market Maker Signals
It is illegal for market makers to talk to each other about trades in the execution queue. Many people believe that, instead, the brokers communicate through signals or codes. The situation with a particular stock is communicated by buying a specific number of penny stock shares, and this transaction is displayed in the level 2 market data. These signals are not expensive for the market makers, as often the share value is less than the commission required. However, these are helpful to work with other brokers to present an even pricing strategy. However, many people doubt that these signals are real, so be wary of traders trying to use them as trading clues.
Some examples of well-known market maker signals are code 1/signal 100 (the entity requires shares), code 4 or 400 (no apparent trend), code 500 (gap the stock), signal 666 (market maker is looking to bring the price down), 777 (market maker is looking to bring the price up), signal 911 (upcoming news release), and signal 999 (fake wall, a strategy by big investors to artificially change the price).
Market Maker Brokers Vs Brokers
Although some market makers act as brokers and vice versa, some key differences should be addressed. While a broker makes money by bringing buyers and sellers together or passing on orders to a third-party liquidity provider, a market maker creates the market for investors by buying and selling assets directly to and from them.
Like a real estate agent finding new owners for property, brokers merely facilitate the sale of an asset, whereas market makers are generally large financial institutions or investment firms that play the role of creating liquidity in the market.
Brokers have an obligation to act in the best interest of their clients and often aim to offer advice on which stocks, currencies and other securities to buy. A market maker may also act as a broker and can recommend securities for which the firm makes the market. For this reason, clients should take care and ask questions when receiving advice from a broker that is also a market maker.
Market Maker Brokers Vs ECNs
Forex trading is generally done through two types of brokers: market makers and electronic communications networks (ECNs).
When market makers set the bid and ask prices on their systems, they have the obligation to trade at these prices with their customers. Although spreads are competitive, the quote is based on the broker’s best interests. This means that there can be a conflict of interest as they may trade against you.
ECNs use quotes from several market participants, including banks, market makers and other ECN traders and display the best bid/ask prices based on these quotes. Most market makers will offer fixed spreads but, with ECNs, these can vary depending on the performance of an asset and the characteristics of the market. With ECNs, it is possible to trade prices at certain times with little or no spread.
For this reason, it is often possible to get better prices from ECNs than market-making brokers.
Market Makers Vs Dealers
Dealers are quite like market makers. Both are generally large banks or financial institutions and make money from quoting a bid and an ask. However, the latter usually stands in an exchange like the New York Stock Exchange (NYSE), while dealers usually operate in over-the-counter or OTC markets. Market maker transactions are settled in a clearinghouse.
Pros Of Market Maker Brokers
Market maker brokers are generally attractive to retail investors with smaller accounts for the following reasons:
- Platforms: Market maker platforms usually have a wealth of resources to improve your trading. Newsfeeds, charting software and signals are commonly found on their platforms.
- Fixed Price: A continuous price throughout trading hours allows for swift entries and exits.
- Fixed Spreads: Even in volatile times, spreads are often guaranteed. This means there is no chance of extensions.
- Account Requirements: Many will offer CFDs, which allow traders to speculate on the price of an underlying asset without physically purchasing it. This means you can trade on just a fraction of the lot size and open an account with as little as $100.
Cons Of Market Maker Brokers
While there are benefits to using market makers, the brokerage model has its downsides:
- Prices: The bid and ask price set by a market maker is often based on their own best interest.
You may find better options on ECNs or other brokerage models.Quotes can sometimes be 10-15 pips away from market value.
- Manipulation: As they set their own quotes, market makers can manipulate prices to prevent traders from reaching their objectives.
- Volatility: Prices are generally less volatile, which can be an obstacle for a strategy like scalping.
What To Look For In Market Maker Brokers
One of the most important factors to look out for in a market maker is transparency. These brokers artificially create the market in which you will be trading and set themselves as the counterpart in any trade you make. This means that, if you lose, the broker makes money. Therefore, it is important to choose only the most reputable market maker brokers, as they have a lot more to lose in the case of incorrect or predatory behaviour.
For a detailed guide see our dedicated web page, though here are some other key factors to look out for:
- Pricing: There is a lot of competition out there, so don’t just go for the first market maker you find. Have a look at the fees and spreads offered by competitors before making your decision. Moreover, finding a broker with a clear and easy to understand pricing structure will prevent you from falling victim to hidden fees.
- Regulation: As mentioned before, market makers are your counterpoint in any trade and set the prices themselves.
To avoid being manipulated or scammed, select a market maker that is regulated by a reputable body, such as the FCA, CySEC, FINRA, or the SEC. The market maker must also have completed the 15C2-11 application to operate. Whether you are in Hong Kong, Korea, Manchester, Houston, or France, online reviews are a great way to gauge a broker’s reputation. The FCA gives some firms exemption from the short-selling regulation for transactions performed due to market-making activities.
Market Range: Be sure you know which assets and financial products you wish to trade before choosing a broker. Some market makers only offer certain instruments, so you don’t want to get caught out after you have opened an account. For example, if you use options trading in your strategies, do your research and find one that offers a range of options.
Platforms: The best market maker brokers will offer the most well-known trading platforms like MetaTrader 4, MetaTrader 5, and cTrader. These platforms allow expert advisors (EAs), which can help automate your trading. You should also have an option to trade on a web trader or via an app. Whatever the platform, you will want the market makers dashboard to be intuitive, user-friendly and have several accessories. Moreover, you will likely want a platform that offers a good range of technical indicators and has positive user reviews. You can also try a platform and broker using demo accounts, which use virtual funds in simulated, real-time trading environments.
Market Makers Education
If you would like to learn more about market makers, there is a wealth of information online for you to choose from. Many brokers will offer tutorials, courses and newsfeeds on their website that can help you get acquainted with the firm. There are even courses like Lovjot Mashiana’s Market Maker University if you want to take your education to the next level.
Market Maker Killers FX Group are an example of a group that creates educational videos for YouTube, which is a great place to learn more about market makers, as well as trading strategies like scalping, delta, neutral and gamma hedging.
Furthermore, social trading apps and forums like Quora and Reddit are a great way to keep up with the news and exchange tips and tricks about market makers with other traders worldwide from the UK, Canada, Australia, the UAE and India.
Successful traders have also written books on market makers, such as The Market Maker’s Edge by Wall Street insider Josh Lukeman, which are designed to inspire and motivate traders.
Well-known analyst Steve Mauro offers downloadable chart indicators, forex strategy advice, key performance indicators (KPIs) and market maker pattern templates for MT4 to help you get started. These are all available as PDFs.
Final Word On Market Makers
Market maker brokers play an important role in the financial markets by providing trading services, jobs and increasing liquidity. Although prices are set by market makers in their own best interests, less volatility can provide some security for investors and better liquidity is good for all traders. There is a lot of competition out there, so, when choosing a market maker broker, be sure to compare other options to find the tightest spreads and most transparent behaviour possible.
FAQs
What Is A Market Maker?
A market maker is a firm or broker that provides bids and offers of a two-sided market along with the market size of each. By trading on both sides of the market, these companies provide a platform for trading, making their money through spreads.
What Are The Best Market Makers?
Some of the biggest market maker names include Zerohedge, BitMex, 32 Trades, XConnect, XTX, XM, FXTM, Pepperstone and FP Markets.
Market makers can be intermediaries appointed by other brokers like Kraken, Robinhood or ASX; XRP’s main holders are market makers. You can become a market maker yourself with ZRX and Xanpool. Note, Zerodha, Zespri and XTB are not market makers.
What Markets Can I Trade With Market Makers?
Market makers generally exist in every finance area, including options, futures, CFDs and securities. Using these products, you will be able to trade on stocks, forex, crypto, exchange indices (like London Stock Exchange or LSE, NASDAQ/XNMS, NSE and NYSE) and commodities. Make sure your broker offers the assets you wish to trade in before signing up.
Do Market Makers Manipulate Price?
Market makers set their own bid/ask prices, which makes it possible for them to manipulate asset prices. However, competition is so stiff that spreads offered by market makers are generally very tight. Finding a market maker broker that is registered with the correct authority will help prevent you from being scammed or manipulated.
Do Market Makers Lose Money?
Market makers may see the value of security drop after it has been purchased from a seller and before it is sold to a buyer.