There are three main categories of major players within the exchange market: banks, non-bank financial institutions, and retail (retail) traders. Individual traders usually don’t have sufficient financial strength to participate directly within the interbank market. Nevertheless, this kind of traders can still trade currencies through two main paths: market makers and transmission networks (ECN). Below we review the category of market makers and therefore the role they play within the decentralized and OTC forex market.
The market maker and its role
A market maker may be a party that continually buys and sells currencies at quoted prices in OTC markets. Here the market maker plays the role of the counterparty in most of the deals executed by individual traders. to place it simply, when a retail trader buys a selected currency, the market maker acts because the seller, and the other way around. it’s worth noting here that the market maker has no choice but to trade against its clients. one in every of the most functions that a market maker performs is to produce the liquidity needed to trade any sort of asset. Doing this role requires that the market maker receive appropriate compensation by adding a price premium to the buying and selling prices. The difference between the buying and selling prices is named the spread, which represents the profit that the market maker makes in exchange for providing liquidity. the worth offered by the market maker depends entirely on the mechanics of demand and provide.
The market maker doesn’t have to predict the long run direction of price movement or push the market during a particular direction by aggregating deals, as its role is proscribed to facilitating trading deals at the displayed prices without having to attend for a counter party to seem. All of those roles help make sure the smooth flow of price action.
In sideways markets, the market maker has time to hide his trades by passing the chance on to a different trader who is willing to require the other view of the present trend. However, this can be not the case in volatile markets, and so the market maker resorts to employing variety of methods to scale back risk, including hedging with one or more banks.
Market makers within the currency market
For the retail trader, the forex broker is that the market maker. In other words, as long because the individual trader doesn’t open an ECN account, the forex broker will still act as a counterparty altogether trades.
For transactions that happen between two banks or between a bank and a serious institution, the role of the market maker during this case are going to be played by a bank or other institution. thanks to the massive competition between banks and forex brokers to accumulate clients who interchange huge volumes, these parties charge very low spreads without affecting the efficiency of the services provided to the retail trader. Thus, it may be said that market makers play an outsized role in providing liquidity and maintaining competitive buying and selling prices within the forex market. Ultimately, the most objective of the market maker is to produce liquidity and to form a profit on the spread or commission.
It often happens that some discuss the role of the market maker during a distorted way, blaming them for the sharp price jumps, which regularly cause hitting stop loss levels. However, there’s no denying the vital role that the market maker plays in maintaining the efficiency of economic markets, including the forex market.
Why do forex brokers pay or charge for rollovers?
Most forex brokers charge or pay a fee to rollover your open position on the currency pair to the following day. These fees is also earned (ie added to your balance) or negative (ie deducted from your balance). However, these fees are usually very small, which is why most novice traders don’t concentrate to them as long as their profits or losses are much greater than the overnight fees. But what’s the explanation why brokerage firms pay or charge swaps, which are called swaps or rollovers? And what’s the rationale that some brokers promote interest-free account types?
The reason for the imposition of the advantages of the swap positions within the Forex market is that the absence of the particular delivery of currencies. as an example, if you purchase 100,000 EUR for a margin of $1,100, the brokerage won’t transfer the transaction value, ie 100,000 EUR, to your checking account. But remember that you just have already paid $110,000 for that quantity in Euros, whether or not you borrowed it from your broker. So technically, as long because the forex broker doesn’t actually hand you that quantity they owe it, in other words they borrowed it from you. within the same example above, you furthermore mght borrowed $110,000 from the broker, while he borrowed 100,000 euros from you. Since we are now talking about loans and debt, then interest rates must apply to them. the worth of interest on currency loans within the interbank market (in which you deal when trading forex with leverage) is set by what’s decided by the central banks. for instance, the rate that you simply can pay on the dollars that your broker has borrowed from your broker is decided by the FRS, while the rate that the broker can pay for the number of euros they need borrowed from you is decided by the policies of the eu financial organisation. The difference between these two rates represents the web rollover fee or the so-called swap rate.