Market Makers are brokers in which the operations of buying or selling financial products (currencies, stocks, indices, commodities,…) requested by their clients are not carried out directly on the market but on the broker’s own trading desk (therefore Market Makers are brokers with a trading desk of the so-called DD or Dealing Desk).
Market Makers brokers create an internal market for their clients and allow them to buy or sell at any time without having to wait for an operation in the opposite direction to be carried out. Market Maker brokers are always ready to offer a bid price and an ask price for each financial instrument they offer, so the trader can execute his trades at any time and with the volume he deems convenient.
In the case of brokers without a trading desk (called Non Dealing Desk or NDD) who send trades directly to the market, when an investor requests a buy or sell order they must find someone to accept that offer at that very moment, and although it is a huge market, it is not always possible. In the case of Market Makers, when a client requests a buy or sell transaction, they always try to find, within their trading desk, another order from another client to compensate for it, but in the case of not finding it, it is the broker himself who would assimilate it by acting as a counterparty and ensuring liquidity and permanent availability to operate even if that transaction represents a profit or a loss for the broker.
For this reason, a conflict of interest may arise between the broker and the clients, since it does not only act as a mere intermediary, but sometimes the broker must also act as a counterpart for those trades.
It is therefore very important, especially in the case of Market Makers, to work with reliable brokers, authorized and regulated by important control bodies, that ensure investors protection and a transparent order execution policy on the part of the broker.
Most of the brokers market makers apply a slightly higher spread (difference between the buy and sell price) than brokers without a trading desk. In this way they compensate the risk of having to cover the trades but they can be less interesting for traders who perform a large number of short-term trades such as day traders or scalpers.
Advantages of Market Maker Brokers
- The great advantage of the Market Maker is that they represent a very agile form of investment and they assure at any moment the availability to execute operations of purchase or sale of any of the financial instruments that they offer such as currencies, commodities, stock exchange indexes, shares, etc.
- Market Maker brokers usually allow to open an account with a very small deposit, their trading platforms are usually very easy to handle especially for beginners and they usually allow also a higher leverage.
- Bid and ask prices are usually more stable and less volatile than those offered by brokers without a trading desk (NDD or Non Dealing Desk).
- Market Makers can offer much smaller lots than standard lots (such as in the Forex market which is 10,000 units). This allows retail investors to invest with less capital in mini or micro lots.
- Until relatively recently only large banks, financial institutions and wholesale investors could invest. Thanks to the advent of Market Maker the possibility to start investing is within the reach of any retail investor. Today anyone can open an account with an online broker and easily start investing from home with an Internet connection or from anywhere with a cell phone or tablet.