Market Makers

Market maker brokers create liquidity by buying and selling securities. This guide will explain the definition of market makers and how they work, along with a review of the pros and cons of this type of broker, including price manipulation. Use our list of the best market maker brokers to start trading:

What Are Market Makers?

Market makers actively quote two sides of a market in a particular security. They play a key role by lodging bids and asks for securities, providing liquidity and depth to markets while profiting from the spread. The most common types of market makers are large banks, financial institutions, and brokerages, giving traders sales and purchase solutions on financial assets.

The presence of market makers plays a big role in ensuring that trading can go ahead seamlessly, meaning if you wish to buy or sell an asset, they will be there to fill your order. If you are trading with a market maker broker, then the brokerage itself will be the counterparty to your trades.

Major FCA-authorised market maker brokers include CMC Markets. Other large market makers that are regulated in the UK include examples like Barclays Bank, BNP Paribas, Citibank, DRW Investments, Lloyds Bank, Natwest Markets, and Standard Chartered.

Making Money – How Does It Work?

Market makers gain revenue through the bid-ask spread that they quote. While market maker brokers follow the general price of the real market, they are not obligated to quote the exact prices. They have the freedom to quote their own prices, and they will usually quote lower bids and higher asks. Since they trade both sides of the market simultaneously, they profit from the difference in price.

As the spread effectively acts as a charge on each trade, market maker brokers that offer tighter spreads are typically more desirable for traders.

Market Makers Vs Trading Brokers

Market makers are not always brokers, with most being banks or other large financial institutions. However, some brokers are also market makers. For example, IG is an FCA-authorised market maker broker in the UK.

Market makers’ role is to provide liquidity to the market; as such, they hold an inventory of tradable financial assets. When they quote their bid-ask prices, they must also quote the tradable volume. When trades are performed with a market maker, they will either buy assets directly from the trader or sell their assets to the trader, making money through the spread between the quoted prices.

Brokers, on the other hand, are intermediaries who facilitate trades between two parties and have the authorisation and expertise to buy/sell financial assets on the trader’s behalf. They usually make money by charging a commission for their services.

However, market maker brokers can trade directly with investors using their asset inventories and setting their own prices, typically allowing them to make money through spreads rather than commissions – although some brokers apply both.

Trading with a market maker broker does come with risk, however. The broker is not always a market maker in all the assets it offers, so it may push the ones that it is a maker for or manipulate the price of those assets to maximise their profits.

Over-the-counter (OTC) CFD brokers can also be market makers, as they typically provide the contracts while also acting as the counterparty, making the market. Because no underlying assets are traded in these contracts, commissions are usually low or zero for share CFDs, and spreads vary between brokers.

IG is a UK-based market maker brokerage that offers real assets and CFD trading. On stock CFDs, they offer no spreads but charge commissions, while on other CFDs they charge spreads. For example, the EUR/GBP forex pair has a minimum spread of 0.9 pips, and an average spread of 2.51 pips.

Pros Of Market Makers

• Both prices and volume are quoted
• Typically low or no commission fees
• The broker acts as counterparty, allowing for quicker trades
• High liquidity as market makers buy and hold stocks/shares/cryptos/options etc
• Market makers available on most major exchanges, including the London Stock Exchange (LSE)

Cons Of Market Makers

• Not all market makers offer brokerage services to retail traders
• Market makers can have conflicts of interest and may trade against you with limited price obligations
• Prices are determined by the market maker, possibly leading to wider spreads
• Limited FCA-authorised market maker brokers

How To Compare Market Maker Brokers

Financial Instruments

Brokers will be market makers for different assets on different exchanges, like the LSE, the AIM, Nasdaq OMX, ICE and LME. Choose a market maker broker that offers the assets you want to trade.

Fee Structure

Market makers typically make money through the spread, so look for a broker that offers tight, competitive spreads on your preferred assets. Also, keep in mind any other fees the broker charges, like overnight holding fees, deposit/withdrawal fees, inactivity fees, subscription fees and so on.

Finding the right balance between features offered and fees charged will allow you to maximise revenue while minimising costs.

Trading Platforms

The trading platform is one of the most important aspects to consider when choosing a broker. Platforms offer different features, with some, like MetaTrader 4 and MetaTrader 5, providing a fuller range of indicators and tools, while others aim to be intuitive and easy to use.

Select a market maker broker that supports a platform you are comfortable using, and where possible test drive it with a demo account so you can practice making trades on the platform without risking any capital.

Base Currency

Market maker brokers with GBP as their base currency are a good option for UK traders since they negate currency conversion fees. You may wish to access a market that uses a different base currency, but bear in mind that this may automatically lower the value of your deposit by applying a cost before you open a trade.

Regulation

Regulated market makers are usually safer to trade with than unregulated brokers as respected agencies like the FCA have strong fund protection measures in place, alongside corporate governance and other requirements. These include the separation of funds, negative balance protection, fund insurance and risk warnings explained.

How To Start Trading With A Market Maker Broker

1. Choose a broker by comparing the list of available market maker brokers that trade your preferred assets. Refer to our guide above for the factors to consider when choosing between companies.
2. Sign up by filling out the broker’s registration form, verifying your email address and uploading any documents or other necessary information.
3. Fund your account using your preferred payment method. Check the broker’s payments page when you sign up to ensure you have a quick and affordable way to transact.
4. Plan a trade by logging onto the platform or a chart site and using indicators and other analysis tools to identify the best time to execute a trade.
5. Open your position by following the procedure on the market maker broker’s platform. This usually involves selecting the asset to trade from a list, choosing between a market and limit order, defining the volume you wish to open, and setting stop loss and take profit orders.
6. Monitor market movements to make sure you are aware of price fluctuations and don’t miss the optimal time to exit your position.
7. Close your position when you are satisfied with the profit you have made, or if you sense a trend reversal or want to limit your losses.

Bottom Line On Market Maker Brokers

Market makers play a key role in providing liquidity to financial markets, and without them, trading would be difficult. Brokers that are also market makers give traders access to this liquidity, facilitating quick trades directly with the broker. They also take their place in many different markets, including those trading real shares as well as CFDs.

There are numerous FCA-authorised and regulated market maker brokers available in the UK, with IG, for example, offering access to more than 18,000 markets. Although some market maker brokers can pose conflicts of interest, traders can find trustworthy firms that offer competitive fees and zero commission. Use our ranking of the best market maker brokers to get started.

FAQ

What Is A Market Maker?

A market maker is a firm or individual that quotes two-sided markets, offering bids, asks, and the market size of a selection of financial instruments. Since the market maker owns the assets in its inventory, it is ready to quickly provide them to traders, providing liquidity and depth to markets and facilitating seamless trading.

Do Market Makers Manipulate Prices?

Market makers control the prices they quote, and have no obligation to quote exact market prices. Instead, they typically profit from the bid-ask spread in the prices they quote.

Brokers that are also market makers may have a conflict of interest with traders, promoting assets that they make markets for with wider spreads to maximise their profits. However, this is not always the case due to rising competition, especially in OTC CFD markets.

What Are Market Maker Brokers Also Known As?

Market makers are also known as liquidity providers for their ability to bring large amounts of liquidity to the market as they can immediately buy/sell assets from their inventory of financial instruments. Both bid-ask spreads and the tradable volume is quoted by the broker, indicating how much liquidity for each asset is available.

What Are The Key Market Makers In The London Stock Exchange (LSE)?

Some of the major market makers on the London Stock Exchange include BNP Paribas, Standard Chartered and GMP Securities. The FCA list all authorised market makers and primary dealers in a document available on their website.

Do Market Maker Brokers Hold Stock?

Market makers do hold stock, allowing them to provide liquidity easily. Furthermore, brokers that are market makers are able to trade this stock directly to retail traders. This allows for trading at the quoted prices rather than paying a high commission fee.