What are Forex traders, market makers, brokers, and their differences?

"Foreign exchange dealers refer to trading companies or individuals that buy and sell foreign bills of exchange. Foreign exchange dealers use their own funds to buy and sell foreign exchange bills, and obtain the bid and ask price difference. Most foreign exchange dealers are concurrent institutions such as trust companies and banks, and there are also companies and individuals who specialize in this business."

A foreign exchange dealer makes a profit from the price difference between buying and selling a pair of currencies. For example, a retail foreign exchange dealer might exchange the euro for the dollar at 1.5475, while converting the euro back to the dollar at 1.5478, the difference in the process would be $0.0003, or 3 pips.

When choosing a broker, we need to consider the system's capabilities and reputation in the industry. Most foreign exchange brokers allow customers to conduct user experience, allowing customers to better understand the overall performance of the system.

It is best to "shop around" before deciding which trading platform to use.

What is a prime broker?

The main brokerage business in mature markets is mainly a collective term for investment banks and commercial banks to provide a package of mid- to back-end financial services to institutional investors and other professional investments. The investment banks and commercial banks that provide services are called main brokers.

This package of mid- and back-end financial services includes: clearing, settlement, custody, consolidated statement preparation, financing, borrowing, technical and solution support, risk management, capital referral, and other fields.

Of course, here we focus on the most basic services: settlement, settlement, and custody.

What is a market maker?

A market maker, also known as a market maker, as the name implies, is to create a trading market. To become a market maker, you need to have a certain strength and credibility, and be able to continuously provide customers with their own exchange rate quotes (with pricing power). Market makers usually put in a sum of money, build up enough inventory of some kind of foreign exchange, and trade with investors in their own funds and currencies. They will first aggregate and filter quotes from banks or ECN brokers, and then add their own profits to the final price quoted to investors.

So we can say that the market maker system is a trading method that uses the price quoted by the market maker to form the transaction price and drive the development of the transaction. When trading, the buyer or seller does not need to wait for the counterparty to appear, the market maker assumes the role of the counterparty (that is, making the market for the customer), so most of the time it is actually trading with the market maker. However, sometimes the market maker's profit comes from the customer's spread, but also part of the customer's loss. Sometimes the market maker will also look for the same amount of orders to sell EUR/USD from its customers' orders, or hand your order directly to the bank. This way the market maker reduces the risk because they can make a profit through the spread without having to trade in the opposite direction from you. However, if there is no order in the opposite direction that can match your order, they will trade with you in the opposite direction.

This is also how market makers provide liquidity to the market, and this also requires sufficient resources and skills, so we mentioned earlier that to become a market maker, you must be a large company with strong strength. In addition, since the trading of the market maker market starts with the quotation of the market maker, the market maker is also called a quote-driven market.

The market maker market generally consists of two layers: the first layer is the retail market between market makers and investors, and the second layer is the wholesale market between market makers and market makers. Retail market makers are usually companies that provide retail foreign exchange trading services to individual traders, and interbank institutional market makers are usually banks or other large companies that provide buy and sell quotes to other banks, institutions, ECNs, and even retail market makers.

Most of the time, market makers are banks, large brokers or hedge funds that account for a large proportion of the total foreign exchange trading volume and have an impact on the exchange rate. Large international banks with hundreds of billions of dollars in daily currency transactions are also called market makers.

Some of the larger well-known market makers include: Deutsche Bank, Barclays Capital, UBS, etc. When it comes to determining whether a bank is a market maker, a bank's share of total trading volume is more important than its total capital. That is, when it matters, a bank's actual ability to influence market movements by providing buy and sell prices, even small and medium-sized financial companies can beforeign exchange marketMarket Maker.

Differences between three quotients and their misunderstandings

Traders participate in trading in the market, that is, they are also the counterparty of their customers. Traders can profit by participating in trading, but the traders we contact on the market basically do not participate in trading to profit. Most of them only need to accept the customer's order internal digestion, which is also the so-called "hedging" or "betting" within the platform. Traders usually fix spreads, and some add commissions. Traders provide you with direct trading. They develop platforms, collect spreads, and receive customer remittances.

Brokers only act as intermediaries for transactions, playing the role of intermediary services. Brokers refer to the retail foreign exchange industry. Now we all open foreign margin accounts through foreign exchange brokers in China. Brokers are somewhat similar to stock brokers in that they provide services to clients, includingaccount opening, changing information, filling out forms, calling services, etc. The broker itself is not involved in the transaction, as the brokerage role of both parties to the transaction, they only charge a commission.

A market maker trades on its own account, and its profit comes from the bid-ask spread. Under a quote-driven system, market makers quote in both directions, and investors trade with market makers at this price.

A few misunderstandings that need to be clarified conceptually:

Traders, market makers, and brokers have strict differences in their respective functions and operation models, while many domestic brokers borrow the concept of word games to steal them and call themselves dealers or generally believe that dealers are market makers. As a result, domestic investors are easily misled and fooled by brokers and agents when it comes to these names and concepts!

1. As far as the definition of a foreign exchange dealer is concerned, it refers to individuals, banks, merchants, banking institutions, etc. Anyone who is involved in foreign exchange transactions can be called a foreign exchange dealer.

2. On the market, the so-called dealer refers to the relationship between the dealer and the customer as counterparties, and is a flexible quotation formed based on the bank's independent quotation and formatted inquiry to reach the final transaction. It does not participate in the market price difference to profit and does not have the ability to hedge OTC risk. It simply relies on the bank's flexible quotation to its corresponding customers. Nominally, it is called a dealer, but it actually plays the role and function of a broker.

Because its own risk is simply by trading with the customer's counterparty, that is, "betting", when the bank does not have a corresponding market quotation or is not conducive to its own client side quotation, it is often prone to the phenomenon of limited turnover in the transaction (that is, it cannot be bought and sold in time, and there is always a prompt dialog box prompting you to change the price, please resubmit) or temporary data stagnation, platform disconnection, etc., which indicates that the current market quotation is not conducive to customer transactions. Such a dealer actually only plays a brokerage activity before the bank and the customer (that is, the bank's market quotation is taken and then quoted to the customer).

When the quotation order that is conducive to their own internal risk hedging can be fully accepted, when the quotation in the market is not conducive to their own, they often do not allow customers to close (that is, we often encounter limited closing, disconnection, slippage, etc.). Similar "dealers" effectively transfer their own risks to their counterparty customers by preventing customers from closing in various ways on the client side, resulting in losses and complaints on customer accounts, directly or indirectly damaging the interests of customers!

Whenever a customer complains to the so-called "dealer" customer service center about such a trading phenomenon, they are often perfunctory with the usual reply as follows: "Our other customers are trading normally, this may be a problem with your network or computer, please check your network or computer". If asked again, they will reply with "This may be due to the excessive centralized transmission and update of data caused by violent market fluctuations, you can try to log in to the trading platform again" and so on.

3. As a trader who is a true market maker, the above situation will not occur. Because this type of market maker trader has the function of independent trading, it also participates in the trading of market price difference profit, and also has the mechanism and ability to hedge risk exposure by itself over-the-counter! So the performance of the corresponding client is to unconditionally accept the quotation of the client, that is, the order acceptance rate is 100%, and there will be no limited turnover, platform drop, slippage and other phenomena! And as a general sense of the transaction cost is only part of its profit, not all! This also maintains the fairness of the client's transaction, minimizes the client's systemic risk, and the profit for the client depends on the trader's own technical level, experience and mentality.

For professional investors with strong profitability, their profits through the market of the corresponding trading platform will also be redeemed in time, and they will also make profits from the market through their own technical level, experience, mentality, etc., or even make a fortune! Because in this trading environment of market maker dealers, customers make money, and market makers make more profits in off-exchange risk exposure transactions with the help of customer funds, rather than the usual method used by most so-called platform traders on the market: a profit model that simply relies on internal "betting" relationships with customers (that is, if customers lose money, the platform makes money, and if customers make money, the platform loses money)! Therefore, there is a common wrong conclusion in the market that "platform dealers can only make money if customers lose money, so most people lose money!". This is also a sarcasm and irony of the current business philosophy of many so-called platform dealers, because there are still a few platform dealers on the market who have been silently working hard to create a fair, reasonable, long-term, development, and win-win investment environment for the majority of investors. However, many brokers, agents, and even investors have given up or rejected platform dealers that can achieve long-term, stable, development, and win-win for the sake of immediate interests.