An Introduction to Foreign Exchange Market Maker:
Foreign exchange market maker refers to those financial institutions(banks and brokers) which perform the function ofintermediaries by quoting buy or sell rates for transacting currencies.
They actively participate in the market and inform otherfinancial institutions and corporations (usually over phone) about the bid and offer price. However, foreign exchange market makers handle only a minor proportion(about $25-50 billion daily, according to CNN) of all the dealings in a foreign exchange market.
Working of Foreign Exchange Market Maker:
The foreign exchange market maker intermediates in currency transaction between hedgers and speculators.International banks acting as foreign exchange market makers typically supply the market with both bid and sell prices. The bid price is the price at which the currency was bought and the ask or offer price represents the price at which it is sold.
The market makers earns his share of income from the spread between the ask price and the bid price. The prices vary in case of spot transactions, however, in case of actively traded currencies(EUR, USD etc.) this spread is minimum of the order of 0 to 3 pips(Percentage in Point is used in foreign exchange trading as the smallest measure of price move).
The forex market is exposed to huge intra-day variations and foreign exchange market makers are obliged to maintain their positions within specific limits. Their need for currency depends on their own needs as well as the needs of their customers most of whom are businesses who are exporters or importers and thus need to exchange foreign currencies into home currency notes.
The Central Banks of many countries have taken their hands off and thus have allowed free float but still supervise the activities and indulge in strategic intervention actions. So foreign exchange market makers carry the obligation of ensuring that the market moves in the intended direction.