In a range-bound market, a market maker will have plenty of time to cover his trades by passing on the risk to another trader who may have an opposite view about the trend. However, it will not be the case in a volatile market. Thus, to mitigate the risk, a market maker will employ several methods, including hedging with one or more tier 1 broker.
In case of a retail trader, a Forex broker will be the market maker. Unless a retail trader has opened an ECN account, a Forex broker will be the counter party to all the transactions. When a trade takes place between two banks or a bank and a large financial institution, the market maker will be another bank or a financial institution.
Due to a huge competition among banks and retail Forex brokers to acquire clients who trade large volumes, the spread is extremely low and does not affect the performance of a retail trader significantly. So, market makers play a vital role in providing liquidity and maintain competitive bid-ask rates in the Forex market.
Ultimately, their objective is to provide liquidity and earn a profit through spread or commission. The role of a market maker is often presented in a distorted manner due to incidents of sharp spikes, which remove stop-loss orders. A market maker is crucial for an efficient performance of financial markets, including the FX market.
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