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Best Market Maker Brokers

Written By

Royston Wild

Written By

Royston Wild

Royston is an experienced investor and writer. His expertise includes stock recommendations through to commodities, forex, and macroeconomic news. Royston's background includes roles as a stocks and commodities reporter, and editor of forex coverage at Shares Magazine.

» Royston Wild Profile Page

Edited By

James Barra

Edited By

James Barra

James is an investment writer with a background in financial services. As a former management consultant, he has worked on major operational transformation programmes at prominent European banks. James authors, edits and fact-checks content for a series of investing websites.

» James Barra Profile Page

Updated

Feb 5, 2024

Market maker brokers are companies that buy and sell financial assets with the use of their own inventories. They allow markets to operate smoothly by supplying deep liquidity and provide important benefits for short-term traders.

This guide will explain how they work, plus the advantages and disadvantages you can experience by day trading with a market maker broker. We’ve also evaluated a long row of companies to bring you our pick of the best market maker brokers.

How Did We Choose The Best Market Maker Brokers?

The first and most important thing we checked is that the company is trusted.

The best indicator of a trustworthy broker is authorization from a creditable body, such as the Securities and Exchange Commission in the US or the Financial Conduct Authority in the UK.

This will help safeguard your capital, ensure you are receiving a high level of customer care, and reduce the risk of falling victim to conflicts of interest.

Following that:

Understanding Market Makers

Market makers play an essential part in trading that takes place on regulated financial exchanges. They act as the middleman between buyers and sellers of financial securities, and continuously quote prices during market hours, thus ensuring that a trade can always be executed.

The deep liquidity that these institutions provide is critical for financial markets. It allows assets to be purchased and offloaded without causing substantial price turbulence.

Furthermore, their presence ensures that short-term traders, such as day traders, can open and close positions more easily.

Market makers also act as the middlemen in over-the-counter trading, where buyers and sellers do business outside of a financial exchange.

Importantly, market makers are not the same as brokerages. While brokers bring buyers and sellers together and pass orders onto third-party liquidity providers, market makers create the marketplace for investors by buying and selling assets directly to and from them.

However, financial institutions can act as both market makers and brokers. Trading with one of these dual-role entities carries advantages for short-term traders, though you should be aware of potential conflicts of interest that may arise.

Notably, market maker brokers may have an inherent conflict of interest as they often take positions opposite to their clients, potentially profiting from client losses. They also control prices and execution, which can lead to practices like price manipulation and less favorable execution for traders.

Strict regulation means that these companies must establish robust procedures and systems to avert any such conflicts.

These include setting up Chinese walls (barriers between different divisions), establishing strict order routing rules, and conducting regular internal audits.

Royston Wild

Author

How Do Market Makers Work?

These institutions anticipate executing high volumes of buy and sell orders each day. And so they hold large inventories of assets, such as stocks, commodities, currencies and bonds, that they stand ready to trade from.

This function means that markets can keep moving by guaranteeing that a buyer and a seller can always find someone to do business with.

When markets are ‘illiquid,’ an investor may have difficulties locating another to make a trade. In these situations, the spread – in other words, the difference between the buy (or bid) and sell (or ask) prices – can be exceptionally high, resulting in greater costs to the trader.

How Do Market Maker Brokers Make Money?

Market-making brokers primarily generate profits through the bid/ask spread. They seek to buy at a lower bid price and sell at the higher ask price, and bank the difference in the process.

These institutions are still able to make money when liquidity is healthy and bid-ask spreads are kept to a minimum.

Whilst margins are small, the colossal volume of trades that are placed each day enables them to make a tidy profit.

Certain market makers will also charge fees or commissions to execute trades. However, a high level of competition means that these costs – along with the difference between bid and ask prices – do not become prohibitive for traders.

Even if a market maker charges a trading fee, this can often be lower than that imposed by other brokers (like agency brokers).

Royston Wild

Author

Example Trade

Let’s say that I wish to trade shares in Colin’s Computers using a market maker broker. I believe prices of the company will rise in price, and decide to buy 100 shares in the business to capitalize on this. The company currently trades at $50 per share.

To begin with, I’ll have a look at the bid and ask prices on my market-making broker’s trading platform. They are listed as:

• Bid price: $49.90
• Ask price: $50.10

This results in a bid/ask spread of $0.20.

When I place my buy order for 100 Colin’s Computers shares, the brokerage will match my instruction with existing sell orders on the market. If there is a seller who’s happy to offload their shares at $50.10, my order will be executed at this price.

In this case, how much profit would the market maker receive?

First off, let’s have a look at the total cost of the trade to me. This stands at $5,010 ($50.10 x 100 shares).

Now let’s assume that the market maker initially bought those shares for their inventory at the lower price of $49.90 each. Their profit would come in at $20 (the bid/ask spread of $0.20 x 100 shares).

Bottom Line

Deep liquidity is the key to straightforward and cost-effective trading. And by using market-making brokers, traders can enjoy an optimal dealing experience and improve their chances of making a profit.

However, using one of these brokerages to trade also presents risks that individuals need to be constantly mindful of. That’s why we recommend choosing one of our top-rated market maker brokers.

FAQ

What Is A Market Maker?

A market maker is a firm or broker that provides bids and offers of a two-sided market along with the market size of each. By trading on both sides of the market, these companies provide a platform for trading, making their money through spreads.

Do Market Maker Brokers Manipulate Prices?

Market maker brokers set their own bid/ask prices, which makes it possible for them to manipulate asset prices. However, competition is so stiff that spreads offered by market makers are generally tight.

Finding a market maker broker that is registered with a respected authority will help prevent you from being scammed or manipulated.

Do Market Maker Brokers Own Stock?

A market maker will buy stock from you and hold it until it finds another buyer. During this time, the broker does own that stock. However, they do not hold shares for their own benefit.

What Are The Advantages Of Trading With A Market Maker Broker?

Market maker brokers with healthy liquidity allow traders to enter and exit positions rapidly, thus enabling you to swiftly capitalize on trading opportunities that arise. This also helps reduce the threat of slippage, where the expected and actual prices of a trade differ due to timing issues.

Many of these brokers also offer fixed spreads, which appeal to beginners especially, providing a clear picture of how much a trade will cost.

What Are The Risks Of Trading With A Market Maker Broker?

While their operations are often closely observed by regulators, the potential for market-making brokers to act in their own interests at the expense of traders is always present.

Also, market makers may not provide the same level of price transparency as other brokers, such as electronic communication network (ECN) brokers.

Additionally, with ECN brokers, it is possible to trade prices at certain times with little or no spread. This means day traders can often get better prices with these companies than with market makers.