Market maker
The name has two senses. On an exchange, a market maker is a firm with trading privileges that quotes both sides of the market, and a designated one can be obliged to buy when sell orders outnumber buy orders and to sell in the reverse case; it trades only against the orders that fill against its own quotes. In retail forex and CFD trading the name is industry usage, defined by no market body, for a broker that prices client orders itself and is the counterparty to them. This page covers the dealer sense, in which the firm quoting the price is the counterparty to every client order it fills.
A market maker is a firm that maintains both a bid and an ask price in an instrument and stands ready to trade at those prices, taking the other side of the orders it receives.
Its main compensation is the spread between the two prices: a buyer pays its ask and a seller receives its bid. After a fill, the market maker holds the opposite position until it offsets that risk against other clients' trades, passes it on through a linked trade, or keeps it.
This page covers the mechanic; it is not trading advice.
Quoting both sides and taking the other side
A buy order fills at the market maker's ask at the moment of execution and a sell order at its bid, so the firm quoting the price is also the firm on the other side of the trade. The Bank for International Settlements (BIS) records the arrangement: when a dealer operates the margin platform a private client trades on, the client is the dealer's direct counterparty. Both the fill price and the Spread come from one firm's quote.
The broker sets the execution mode for each symbol. Under Market Execution in MetaTrader 5, it decides the fill price of a Market order, and sending the order is advance consent to that price. Instant Execution lets it refuse the requested price and return a new one, a Requote. Exchange Execution sends the order to an external exchange instead.
BIS reporting describes what happens to the risk after the fill. Internalisation offsets one client's risk against the opposite risk from other clients. Hedging passes it on, through a back-to-back trade, one "created to transfer the risk of the original trade or set of trades", or by trading as a price taker that takes Liquidity from another bank or market maker. Whatever is neither offset nor passed on stays on the firm's own book. Passing risk on adds a second trade and leaves the first in place: the client's trade is still with the market maker.
Being on the other side of every trade is not the same as holding the opposite market position. A client's profit on one contract is the market maker's loss on it, which is why the role is commonly read as a standing position against clients. Opposite client trades cancel inside the book, though, so the price risk carried is the net of the clients' positions, not their sum: in the example below, 4 of 5 lots cancel.
Two clients, one quote: what the market maker keeps
At an example EUR/USD mid of 1.1253, a market maker quotes 1.12524 / 1.12536, a 1.2-pip spread assumed for the example; real spreads are set by the broker. Client A buys 3 lots at the ask and client B sells 2 at the bid, each lot being the standard Lot size of 100,000 euros.
Worked example
Spread kept on offset volume = (Ask − Bid) × Units matched on each side- Quote (illustrative)
- 1.12524 / 1.12536
- Client A buys at the ask
- 3 lots (300,000 EUR)
- Client B sells at the bid
- 2 lots (200,000 EUR)
- Offset internally
- 4 of the 5 lots (2 sold at the ask against 2 bought at the bid)
- Market maker's net position
- Short 1 lot (100,000 EUR)
Spread kept, 0.00012 × 200,000
$24.00
On the cancelled pair the market maker sold at 1.12536 and bought at 1.12524, so the $24.00 is locked whatever the price does next. Only the 1 lot short carries price risk.
What the internalisation figure counts
Dealers in the BIS Triennial Survey were "matching more than 80% of customer trades within their own internal liquidity pools", the BIS Quarterly Review reports. That describes large dealer banks' spot desks, spot meaning settlement within two business days, and is not a figure for retail brokers. BIS reporting guidelines define the ratio as (1 − customer spot turnover hedged on external markets ÷ total customer spot turnover) × 100.
The 100% row is arithmetic on the published formula, not a BIS finding: a kept residual never enters the hedged term, so keeping it raises the ratio even though only 4 of 5 lots were offset. BIS says the definition "purposefully abstracts" from how long the dealer holds the risk. On the formula alone, a high ratio shows risk was not hedged externally, not how much of it was offset. BIS asks a dealer that never offsets client risk against other clients' risk to report zero, and counts only principal e-trading desks that take risk on their own books.
When the price moves
With the residual covered by Hedging at the 1.12530 mid, a simplifying assumption since a real hedge costs some spread, the total is fixed at $24.00 + $6.00 = $30.00, half the spread on each of the 5 lots.
Kept unhedged, the residual follows the price. Marked at the mid after a 10-pip rise to 1.12630, the 1 lot short from 1.12536 shows −$94.00, taking the market maker to −$70.00. Client A's 3 lots show +$282.00 and client B's 2 lots −$212.00: +$70.00 combined, the exact mirror, because every client trade has the market maker on its other side. A 10-pip fall to 1.12430 reverses every sign but not the amounts: each result moves by the same $100.00 around a fixed spread edge, $6.00 on the residual and $30.00 for the market maker, so the residual shows +$106.00, the market maker +$130.00 and the clients −$130.00 combined.
Related terms
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Common questions
Is a market maker's result the opposite of its clients' result?
Yes, on every client trade it keeps on its book, including the trades that cancel each other; a hedge outside the client book breaks the mirror. On EUR/USD at an example mid of 1.1253 and an assumed quote of 1.12524 / 1.12536, one client buys 3 standard lots and another sells 2. The 4 lots that cancel leave the market maker $24.00 of spread and the two clients −$24.00 combined, whatever the price does. If the 1-lot residual is kept unhedged through a 10-pip rise, the market maker ends at −$70.00 and the clients at +$70.00 combined, marked at the mid; hedged at the mid, the residual adds $6.00 instead, so the market maker ends at $30.00 while the clients still show +$70.00.
What does it mean that dealers internalise more than 80% of customer trades?
The BIS Quarterly Review reports dealers in the Triennial Survey "matching more than 80% of customer trades within their own internal liquidity pools". The figure covers large dealer banks' spot FX desks, not retail brokers. BIS defines the ratio as (1 − customer spot turnover hedged on external markets ÷ total customer spot turnover) × 100. On an illustrative 5-lot EUR/USD flow at 1.1253, with 4 lots offset and the 1-lot residual hedged, it is 80%; with the residual kept, the formula gives 100%.
Is the market maker's spread the same as a commission?
No. The spread is the gap between the market maker's bid and ask, collected through the fill prices; commission is a separate charge on the deal. On an assumed EUR/USD quote of 1.12524 / 1.12536 around an example mid of 1.1253, one client buying 2 standard lots at the ask and another selling 2 at the bid leave the market maker 0.00012 × 200,000 = $24.00 of spread; any commission the broker's terms set is charged on top.