Filling Client Orders. How Market Makers Earn a Profit.
A market maker usually gets quotes for an instrument from multiple sources, such as large banks and exchanges. All of this information gets analyzed, taking into account any important political or economic factors, orders from the market maker’s other clients and, of course, the market maker’s need to make a profit. This analysis results in the quote the market maker offers its client. It’s important to understand the basic principle of quoting — the market maker offers its client the price at which it is prepared to complete the transaction at that moment. In other words, the market maker bases its price on other companies’ quotes and its clients’ orders. This price may differ in either direction from the prices offered by other market makers.
EXNESS aggregates quotes from several large European banks, in addition to which it continually analyzes client orders for all instruments. As a result, EXNESS can offer its clients the best prices (this becomes obvious if you look at the spreads for the major currency pairs). For instruments where there are lots of offsetting positions, the Company can reduce spreads almost without risk.
EXNESS’ trade volume, which exceeded USD 1 billion per day in 2011, allows the Company to offer its clients the best quotes without slippage and with a minimum of requoting.
The following diagram provides a clear pictures of how EXNESS establishes its ask price for EUR/USD:
How does a market maker turn a profit? The answer is simple: by buying lower and selling higher on all the instruments it trades. This is achieved by carefully managing the bid and ask prices for any single financial instrument. The market maker slightly adjusts the bid and ask prices it receives from its liquidity suppliers in order to create profit for itself. At the same time, it analyzes its offsetting positions in order to offer its clients the very best terms. In the broadest sense, a market maker earns on the spread (the difference between bid and ask prices).
EXNESS builds client relationships that last by carefully analyzing quotes and ensuring that its clients get optimal terms. You may be wondering but what about the conflict of interests between the market maker and its traders? At EXNESS this conflict of interests is limited to the spread. The market is based on conflict by definition, since it’s impossible for both sides of every deal to win. However, any financial company that wants to survive has to value its reputation and its clients over short-term profit. No serious market maker would try to shoot down beginning traders’ Stop Loss orders, since that would risk the trust of its established clients.