Stand at a market maker's desk during a quiet London afternoon and the screen looks dull. A two-sided price in a handful of instruments, updating constantly, with size on each side. The interesting number is not the price. It is the position line underneath it, showing how much of each instrument the desk is currently holding because someone traded against its quote and it has not yet found the other side.
That line is the whole business. A market maker sells the service of immediacy: you can trade right now, in either direction, at a published price. The payment for that service is the spread. The risk is that the trader who hit the quote was right about direction and the desk is now holding a losing position it did not choose.
The two-sided obligation
What separates a market maker from any other trading firm is that it quotes before it knows what you want. A directional trader picks a side. A market maker publishes both and lets the counterparty choose. On a regulated exchange this can be a formal obligation with minimum size and maximum spread requirements attached to a designated market maker status. In over-the-counter markets like spot FX it is a commercial commitment rather than a legal one, which is why quotes can be withdrawn.
The income model looks trivial and is not. If the desk buys at the bid and sells at the ask in equal size, it collects the spread and ends flat. Real flow never balances that neatly. Orders arrive in clumps, usually in the same direction, and usually when something is happening. The desk ends up long or short and has to decide whether to hedge the position externally, quote more aggressively on the opposite side to attract offsetting flow, or hold it.
How the spread gets priced
A quoted spread is a calculation with a few inputs. Current and expected volatility comes first, because it sets how far price can travel before the desk can offload inventory. Then expected volume, since a busy book turns over faster and needs less compensation per trade. Then the cost of hedging in the underlying market, which is the spread and depth the desk itself faces. Finally, the toxicity of the flow: a counterparty whose orders are consistently followed by an adverse move is quoted wider, or not at all.
This is why spreads behave the way traders observe them. They compress in liquid hours, widen at the daily rollover when the underlying market thins, and widen sharply around scheduled data. None of that is a broker choosing to be difficult. It is the same arithmetic run with different volatility and depth inputs. The pattern is set out in more detail in spread widening at rollover.
The number that matters is not the tightest spread you have seen but the spread that is there when you need to get out. A firm quoting 0.2 pips in quiet hours and disappearing at 15:30 is more expensive than one quoting 0.6 pips continuously.
When your broker is the market maker
Retail brokers sit somewhere on a spectrum. At one end, every client order is passed straight through to an external liquidity provider and the broker earns a markup or commission. At the other, the broker internalises the order and becomes the counterparty itself, which makes it a market maker for that trade. Most operators run a mix, routing some flow out and keeping the rest, and the mechanics of that decision are covered in A-book versus B-book.
The uncomfortable question follows immediately: if the broker holds the other side, does it want the client to lose? The honest answer is that a well-run internalising book does not think in those terms at all. It thinks in net exposure. Client A is long two lots of gold and client B is short three, so the desk is net short one lot and hedges that residual. The desk's income is the spread on all five lots. What it wants is offsetting flow, not losing clients.
Where it goes wrong is when a firm has no exposure limits, no hedging discipline and a revenue line that depends on client losses continuing. That is a risk management failure with a predictable ending, and it is the reason regulators require the execution model to be disclosed and capital to be held against it. Anyone running or building this kind of operation should read how broker risk management works before deciding what to internalise, because the systems that enforce those limits are ordinary software problems with expensive consequences.
Reading a market maker from the outside
Traders cannot see the desk, but its behaviour leaves marks. Continuity is the first one: does the quote stay live through a data release, or does it vanish and return three seconds later at a very different level. Second is symmetry, meaning whether slippage falls in your favour roughly as often as against you. Consistent one-directional slippage is not a market condition, it is a routing or pricing decision. Third is size, since a tight price in one lot that becomes a wide price in ten is a quote for a different trader than you.
Keeping a plain log of intended price against filled price for a few hundred trades tells you more than any marketing page. Pair it with the timestamps and you can see whether the bad fills cluster around news, which is normal, or scatter through ordinary hours, which is not. A trading journal that records execution alongside the trade idea turns this into a routine check rather than an argument.
Why the model persists
There is a recurring argument that internalisation should be abolished and every retail order routed to an external venue. In instruments with deep external liquidity that is often the better outcome for the client. In others it is not. A broker offering small-size trading in an exotic pair or a niche index cannot always find an external provider willing to quote that size at a sensible price, so the alternative to internalising is not a better fill, it is no market at all.
What matters is that the client knows which model applies, that the firm holds capital against the risk it keeps, and that the execution data supports what the firm says it does. Trading on leverage carries a high risk of loss under any execution model, and choosing a counterparty carefully changes the cost, not the risk.
"People hear market maker and think the firm is betting against them. The firm is betting on the spread and hating the position. Inventory is the thing it wants off the book, not the thing it wants to keep."
— Alex Onta, Executive Director, SINGUARD
Key Takeaways
- A market maker quotes both sides continuously and earns the spread, taking on inventory risk as the cost of doing so.
- The quoted spread is priced from volatility, expected volume and the cost of hedging, which is why it widens before news and at rollover.
- A broker acting as market maker is not automatically in conflict with clients, but the arrangement needs disclosure and internal risk limits.
- Judge a market-making counterparty on quote continuity and fill behaviour under stress, not on the headline spread in quiet hours.
Frequently Asked Questions
Do market makers profit when I lose?
A market maker's designed income is the spread across a large number of trades, and it hedges to stay flat. A firm that internalises client flow does hold the other side of some positions, which is why regulators require disclosure of the model and why a serious operator sets hard net exposure limits rather than relying on client losses.
Why do spreads widen when a market maker is still quoting?
Widening is how a quoting firm stays in the market when uncertainty rises. The alternative is pulling the quote entirely. A wider spread compensates for the higher chance that price moves against the inventory before it can be hedged.
Is an ECN broker better than a market maker?
They solve different problems. Direct routing to external liquidity gives raw pricing plus commission and works well for large or frequent orders. An internalising model can quote continuously in small size and in instruments where external liquidity is thin. The model matters less than the disclosure and the execution record.
About the Author
Alex Onta is an Executive Director at SINGUARD. He built eTrader, the terminal, the mobile apps, eTrader Broker, Copytrading, Business and Community, along with the worldwide clustered-server infrastructure it all runs on, with his brother Roman Onta helping on the design, and he leads that division today. Together with Roman he builds the Prop Firm CRM, the Broker CRM, Scalegram and CopySignals, and the two of them carry worldwide compliance, payment processing and international business structuring side by side. He lives and works in Dubai for most of the year. Meet the executive duo leading Singuard's five divisions.