Market makers or called dealing desk brokers represent a type of broker that internalize flows and are taking the opposite side of a transaction submitted by their clients.
The market making broker is only quoting a feed of prices to its clients. These feeds may or may not be the exact same as the prices quoted on the interbank market.
Any order a client enters is processed internally and never goes out to the market, except in rare cases where a market making brokerage identifies a client as a very high risk and chooses to route the flow to another liquidity provider.
Such brokers are typically providing very quick execution, however an inherent conflict of interest is possible due to the fact that the brokers is making the bulk of its profits from client losses.
Role of Market Makers in FX Industry
In the FX space, a market maker quotes two-way prices for tradable currency pairs. In doing so these market makers quite literally make the market.
In particular, a forex market maker performs three specific tasks.
This includes setting bid and offer prices within a given currency pair, committing to accepting deals at these prices within certain constraints, and taking the resulting exposure on to their own book.
In terms of accounting for this exposure onto their book, market makers can opt to hedge the exposure with another bank, pending favorable rates.
How quickly or slowly, or how much risk they lay off will be at their own discretion.
Market makers can make profit through several techniques.
If these entities identify enough flow at both sides of their quote, they can simply collect the bid offer spread.
Consequently, market makers can net off their exposure. Presently, large banks see huge flows of foreign currency transactions from their operations around the world in a multi trillion-dollar-a-day industry.