Jiří Filip Press Release: The term Market Maker has been used de facto in the investment and trading sphere ever since retail investors and traders began to be active in the financial markets. Although this topic has been discussed for many years, many people are still confused by this concept and market making is very often mentioned mainly in a negative sense. But what does that really mean? And is it a risk for the average person?
Generally speaking, Market makers, or market maker, is a key player involved in creating markets and ensures that buyers and sellers are always able to trade with your assets. In today's financial markets, the market maker plays an important role in maintaining liquidity and the smooth flow of trading.
A popular argument why some investors and traders consider market making a negative thing is the assumption that the broker is the counterparty to an open trade. So if the client is in loss, the broker is in profit. Thus, the broker has an incentive to support the loss of its clients. But this is a very superficial view of the matter, which ignores many aspects of this issue. In addition, if we are dealing with EU-regulated brokers, such an example of abuse of authority would be difficult to implement from the point of view of the supervision of legal authorities.
To get an idea of how the brokerage model really works, here is an example of XTB:
The business model used by the company XTB combines features of the agent and market maker models (market maker), in which the company is one party to transactions concluded and initiated by clients. For transactions with CFD instruments based on currencies, indices and commodities, XTB handles part of the transactions with external partners. On the other hand, all CFD transactions based on cryptocurrencies, shares and ETFs, as well as CFD instruments based on these assets, are carried out by XTB directly on regulated markets or alternative trading systems - therefore, it is not a market maker for these asset classes.
But market making is far from the main source of XTB's income. This is the income from spreads on CFD instruments. From this point of view, it is therefore better for the company itself that the clients are profitable and do business in the long term.
In addition, there is an often neglected fact that sometimes the role of market maker can be loss-making for the company, so it represents a certain risk even for the broker himself. In an ideal case, the volume of clients shorting the given instrument (betting on its decline) would exactly cover the volume of clients longing it (betting on its growth), and XTB would only be an intermediary connecting these clients. In essence, however, there will always be more traders on one side or the other. In such a case, the broker can side with the lower volume and match the necessary capital so that all clients are able to open their trade.
The role of market maker is not a fraudulent scheme, but a process that is in the brokerage business needed so that the client's demand can be completely covered. However, it must be added that these are cases of real regulated brokers. XTB is a publicly traded company where all necessary information is publicly available and easily searchable. Unregulated entities should always be on the lookout.
If you would like to know more about the topic, Sales Director XTB Vladimír Holovka talked about market making and other aspects of brokerage business in this interview:
