Market Making in Equities and Decentralized Forex Markets
Summary
The document explains what it means to provide liquidity by posting limit orders that other traders can execute. It highlights the central risk for a trader attempting to make markets: when prices move quickly, an order may fill just as the market moves against the position, leaving the trader unable to exit without a loss. The discussion emphasizes the need to understand who will trade against posted quotes and how inventory risk arises.
For equities, the response points to dealing simulation training as a way to learn market making, without outlining a specific strategy or evidence from trading results. For forex, it describes practical barriers: establishing a prime broker or prime-of-prime relationship requires capital and meeting jurisdiction-specific regulatory requirements, while the fragmented market requires separate access arrangements with electronic networks, liquidity providers, or banks. Requirements vary by firm and country, so the document is an overview rather than a detailed operational guide.
Key ideas
- Market making involves posting limit orders that other participants can execute.
- A filled quote can create a losing position if prices move against the market maker.
- Forex market access may require a prime brokerage relationship and substantial capital.
- Forex liquidity providers set their own access requirements in a fragmented market.
Tags
Full text
# How could I become a market maker in forex/equity market? # How could I become a market maker in forex/equity market? By being a market maker, I mean when I post a limit order, someone could take your order. For example, suppose during this second the bid-ask is 1,1.01 constantly and I posted a limit order to buy at 1. If I am not trading as a market maker, that order would not be filled. If I am, it may be filled if someone else post an market sell order. ## Answer by rupweb (score 2, accepted) https://quant.stackexchange.com/a/30773 The best training I have heard of for this, other than managing to get a job on the desk is ACI Dealing Simulation Course. That would answer all your questions. The problem you have is that as a market taker, you're right, you can post buy and sell orders simultaneously as if you're a market maker. Who is your client though? If you're posting orders on an exchange and the market moves too quickly, you'll get put into a position when the market is going against you, which you won't be able to get out of without losing money. This reminds me of General Patton's speech (google it). The point is to make the other son of bitch lose money, not you. ## Answer by pyCthon (score 1) https://quant.stackexchange.com/a/30775 Since the comments answered the equities portion. I'll focus on forex. First you would need sufficient capital to setup a prime broker or prime of prime relationship. The capital requirement and regulatory requirements here varies across country. Second, since in the forex world there is no centralized exchange. You would need to convince each individual ECN, market maker or big bank, exc. exc. to allow you to provide liquidity to them. Each firm will have its own set of requirements.
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