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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 major European banks. Simultaneously, client orders are continually analyzed. Based on generalized data about bank prices and client order volumes across all trading instruments within the company, Exness can offer clients more advantageous prices (this becomes clear after studying the statistics for spreads on the main currency pairs). For instruments where there are lots of offsetting positions, the company can reduce spreads almost without risk.

Exness Group's trading volume, which exceeded 1 billion USD 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 picture of how Exness establishes its ask price for EUR/USD:

Exness ask price establishment

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 its approach to client relations based on long-term partnerships, skillfully using the ability to flexibly change quotes and offering its clients the best conditions. Here we should mention the often discussed topic of a conflict of interests between a market maker and ordinary traders. Yes, there is a conflict of interest, but it appears only in the spread. Everybody competes against each other in the market. It's even theoretically impossible for everybody to only make money. Obviously, a financial company with a long track record values its reputation and clients over short-term profit. No serious market maker would try to shoot down beginning traders’ Stop Loss orders, since an avalanche of complaints from regular clients about quotes and order execution would follow.

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