Market Makers and Their Activities
A market maker can be anyone, a business firm or an individual that can stand ready to buy and sell a particular security throughout the trading session. Their activities provide liquidity and a fair and orderly market in that security. Sometimes, no one may be selling a stock that you're interested in. Or no one may be bidding on a stock that you're trying to sell. This is where the market maker comes in. By making a market or making bids and offers to accommodate orders that cannot be matched in the market. A bid-ask spread is maintained by the market maker. Spread is the difference in price between the costs to buy and sell the security.
For example, the market bid and ask from a seller for $50 per share. Now he has 1,000 shares of KK stores sitting in his account, and he hopes to get a buyer real soon. The market maker offers to sell his shares for $50.04 each, thus creating or making a new market. Because his offer is now the best offer. He attracts a buyer who is willing to purchase the 1,000 shares. The bid-ask spread (in this case 4 cents) represents the market makers profit of $40. By buying low and selling high market makers capture profits through these relatively small spreads. The market maker mentioned in the example can lose money if the stock value drops below $50 by the time a buyer emerges. In this case, the market maker may have to sell at a price below which he purchased KK Store stocks.
By charging commissions and fees, the market maker is compensated for taking on risks like this. A market maker serves an important role in the financial markets. As they help to reduce liquidity risk and facilitate the pace at which participants can enter or exit the market.
But their manipulation in the market can't be ignored. As I said earlier, the market maker can be anyone. One who has the kind of monetary resource that can affect the market rate. Major retails banks, Financial Firms, Companies, Hedge Funds, Individual Speculators and even your broker (mostly Dealing Desk brokers) can act as a market maker. They have the control over price quotes that will be infront of the retail traders. So, inevitably they try to manipulate the market in their favor.
Most Dealing Desk brokers earn commission from spreads. So, they are already manipulating the price quote. Even DD brokers trade against their own customers to make balance in market, which is so nice of them and sometimes to make balance in their bank accounts, which not so fair. This is not the case for every DD (Dealing Desk) brokers. But there's always a fair amount of chances. You should consider researching on them, whether they are regulated or not. You won't find these kind of practices if your dealing with ECN (Electronic Communications Network) Brokers or STP (Straight through Proccessing) Brokers. Though, sometimes they also acts alike market makers, but they will always provide the closed quotes from the central exchange rates. As you already pay them for their services.
In case of Forex, Major retails banks(such as Deutsche Bank, UBS, Citigroup) are the main market makers. But nowadays, these group of market makers have moved away from their traditional role, and diversify into proprietary trading themselves, as well as trading on behalf of their clients, along with offering retail brokerage accounts to the small trader and speculator. Big named companies are also responsible for market price variations. But they are not regular participants and even their effect is comparably limited to say.
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