What is a Market Maker?

Lexical)A Market Maker is the counterparty to the client. The Market Maker does not operate as an intermediate or trustee. A Market Maker performs the hedging of its clients' positions according to its policy, which includes offsetting various clients' positions, hedging via liquidity providers (banks) and its equity capital, at its discretion.
Who are the Market Makers in the Forex industry?Banks, for example, or trading platforms (such as Easy-Forex™), who buy and sell financial instruments at the market. That is contrary to intermediates, which represent clients, basing their income on commission.
Do Market Makers go against a client's position?By definition, a Market Maker is the counterparty to all its clients' positions, and he always offers a two-sided quote (two rates: BUY and SELL). Therefore, there is nothing personal with the trading conduct between the Market Maker and the customer. Market Makers regard the total positions of their clients as a whole, same goes for banks and other market makers in the Forex market. They offset between clients' opposite positions, and hedge their net exposure according to authorities' guidelines and their risk management policies.
Do market makers and clients have a conflict of interest? Market makers are not intermediates, neither portfolio managers, nor advisors who represent customers (while earning commission), but rather they buy and sell goods to the customer. By definition, the Market Maker always provides a two-sided quote (the sell and the buy price), hence maintains neutrality as for the client. Banks do that, same with merchants in the markets, who buy goods and sell it to customers. The relationship between the trader (the customer) and the Market Maker (the bank; the trading platform; Easy-Forex™; etc.) is simply based on fundamental market forces: supply and demand.
Can a Market Maker influence market prices against clients' position? Definitely not, because the Forex market is the nearest to being a "perfect market" (as defined by economics theory). This is the biggest market today, reaching a daily volume of 3 trillion dollars throughout the globe. That means that there is no single participant in the market, banks and governments included, who can consistently push the price in a certain direction.
What is the main source of earnings to Easy-Forex™?Being a Market Maker, the major source to earnings is the spread between the bid and the ask prices. Accordingly, Easy-Forex™ maintains neutrality (as for the direction of any or all deals made by its traders), since the leading source for its income is the spread it earns.
How do Market Makers manage their exposure? The way most Market Makers hedge their exposure is to hedge on bulk. They aggregate all clients' positions and pass some, or all, of their net risk to their liquidity providers. Easy-Forex™ hedges its exposure in a similar fashion, in accordance to authorities' instructions and its risk management policy. As for liquidity providers, Easy-Forex™ works in cooperation with world's leading banks which provide liquidity to the Forex industry: UBS (Switzerland) and RBS (Royal Bank of Scotland).

Who trades currencies, and why?

Daily turnover in the world's currencies comes from two sources: Foreign trade (5%). Companies buy and sell products in foreign countries, plus convert profits from foreign sales into domestic currency.
Speculation for profit (95%). Most traders focus on the biggest, most liquid currency pairs. "The Majors" include US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. In fact, more than 85% of daily forex trading happens in the major currency pairs.


The world's biggest market, trading 24 hours a day

With average daily turnover of US$3.2 trillion, forex is the largest market in the world.
A true 24-hour market from Sunday 5 PM ET to Friday 5 PM ET, forex trading begins in Sydney, and moves around the globe as the business day begins, first to Tokyo, London, and New York.
Unlike any other market, investors can respond immediately to currency fluctuations, whenever they occur - day or night.

Trading Strategy

Making trading decisions and developing a sound and effective trading strategy is an important foundation of trading. Before developing a trading strategy, a trader should have a working knowledge of technical analysis as well as knowledge of some of the more popular technical studies. Please visit these pages for detailed information.


Sample Strategy 1 - Simple Moving Average

Successful trading is often described as optimizing your risk with respect to your reward, or upside. Any trading strategy should have a disciplined method of limiting risk while making the most out of favorable market moves. We will illustrate one decision making model which uses a Simple Moving Average ("SMA") technical study, based on a 12-period SMA, where each period is 15 minutes. This is one example of a trading decision making strategy, and we encourage any trader to research other strategies as thoroughly as possible.

We will use a simple algorithm: when the price of the currency crosses above the 12-period SMA, it will be taken as a signal to buy at the market. When the currency price crosses below the 12-period SMA, it will be a signal to "Stop and Reverse" ("SAR"). In other words, a long position will be liquidated and a short position will be established, both with market orders. Thus this system will keep the traders "always in" the market - he will always have either a long or short position after the first signal. In the chart below, the white line represents the price of USDJPY, the purple line represents the 12-period SMA of USDJPY, and the red line indicates where USDJPY crosses above the SMA, generating a buy signal at approximately 129.90:

This is a simple example of technical analysis applied to trading. Many strategies used by professional traders make use of moving averages along with other indicators or "filters". Note that the moving average method has an element of risk control built in: a long position will be stopped out fairly quickly in a falling market because the price will drop below the SMA, generating a stop-and-reverse signal. The same holds true for a sell signal in a rising market. Note that the SMA is generated automatically by GCI's integrated charting application.



Sample Strategy 2 - Support and Resistance Levels

One use of technical analysis, apart from technical studies, is in deriving "support" and "resistance" levels. The concept here is that the market will tend to trade above its support levels and trade below its resistance levels. If a support or resistance level is broken, the market is then expected to follow through in that direction. These levels are determined by analyzing the chart and assessing where the market has encountered unbroken support or resistance in the past.

For example, in chart below EURUSD has established a resistance level at approximately .9015. In other words, EURUSD has risen up to .9015 repeatedly, but has been unable to move beyond that point:

The trading strategy would then be to sell EURUSD the next time it gets close to .9015, with a stop placed just above .9015, say at .9025. This would have indeed been a good trade as EURUSD proceeded to fall sharply, without breaking the .9015 resistance. Hence a substantial upside can be achieved while only risking 10 or 15 pips (.0010 or .0015 in EURUSD).





Spot Forex versus Currency Futures

Many traders have made the switch from currency futures to spot foreign exchange ("forex") trading. Spot foreign exchange offers better liquidity and generally a lower cost of trading than currency futures. Banks and brokers in spot foreign exchange can quote markets 24 hours a day. Furthermore, the spot foreign exchange market is not burdened by exchange and NFA ("National Futures Association") fees, which are generally passed on to the customer in the form of higher commissions. For these reasons, virtually all professional traders and institutions conduct most of their foreign exchange dealing in the spot forex market, not in currency futures.

The mechanics of trading spot forex are similar to those of currency futures. The most important initial difference is the way in which currency pairs are quoted. Currency futures are always quoted as the currency versus the US dollar. In Spot forex, some currencies are quoted this way, while others are quoted as the US dollar versus the currency. For example, in spot forex, EURUSD is quoted the same way as Euro futures. In other words, if the Euro is strengthening, EURUSD will rise just as Euro futures will rise. On the other hand, USDCHF is quoted as US dollars with respect to Swiss Francs, the opposite of Swiss Franc futures. So if the Swiss Franc strengthens with respect to the US dollar, USDCHF will fall, while Swiss Franc futures will rise. The rule in spot forex is that the first currency shown is the currency that is being quoted in terms of direction. For example, "EUR" in EURUSD and "USD" in USDCHF is the currency that is being quoted.

The table below illustrates which spot currencies move parallel to the futures contract and which move inversely (opposite):
Forex
Symbol Currency Pair Futures
Symbol Directional
Relationship
GBPUSD British Pound / US Dollar BP Parallel
EURUSD Euro / US Dollar EU Parallel
USDJPY US Dollar / Japanese Yen JY Inverse
USDCHF US Dollar / Swiss Franc SF Inverse
USDCAD US Dollar / Canadian Dollar CD Inverse
AUDUSD Australian Dollar / US Dollar AD Parallel
NZDUSD New Zealand Dollar / US Dollar ND Parallel

Forex Market Summary

U.S. Dollar Trading (USD) was mixed versus a number of majors, holding firm on positive Retail Sales out of the U.S. for the month of January coming above expectations, as Core figures were released at 0.3% (F: 0.2%; P: -0.3%R), whilst Headline figures came in at 0.3% (F: -0.2%; P: -0.4%). In U.S. share markets the NASDAQ was up by 108.13 points (+1.21%) whilst the Dow Jones was also higher by 178.45 points (+1.45%). Crude oil was higher by US$0.36 a barrel to US$93.14 after Venezuela said it would stop supplying oil to EXXON Mobil. Thursday sees the weekly release of Initial Jobless claims, whilst Ben Bernanke, and Henry Paulson are scheduled to testify in front of the Senate Banking Committee
The Euro (EUR) held firm, despite US retail sales unexpectedly rising for the month of January. In Eurozone specific news, Industrial Production declined by -0.2% for the month of December, well short of the forecasted figures of 0.6%, and inline with recent rhetoric surrounding slowing growth in the Eurozone. Overall the EURUSD traded with a low of 1.4530 and a high of 1.4600 before closing the day at 1.4579 in the New York session. Looking ahead, key growth data in the form of GDP for the fourth quarter 0.3% (Forecast: 0.4%; Previous: 0.8%)
The Japanese Yen (JPY) fell to a one-month low against the dollar after U.S. retail sales unexpectedly rose last month, allaying concern that the world's biggest economy will slide into a recession and hurt global growth. The currency dropped against 14 of the 16 most-active currencies as U.S. stocks rose, signaling traders are more confident to bet on higher-yielding assets funded by loans in Japan. Overall the USDJPY traded with a low 107.00 and a high of 108.37 before closing the day 108.22 in the New York session. Japanese GDP data released on Thursday morning was released at 0.9% (Forecast: 0.4%; Prior: 0.4%) for the fourth quarter.
The Sterling (GBP) rallied to a two week high against the Euro after the Bank of England raised its inflation forecast, prompting traders to pare bets on interest-rate cuts from the UK. The Sterling Pound also traded at week highs versus the dollar as the central bank forecast in its quarterly inflation report on Wednesday that price growth will overshoot its 2 percent goal in two years even as 'downside' risks to the economy remain. The pound also gained as a government report showed unemployment fell to a three-decade low in January. Overall the GBPUSD traded with a low of 1.9552 and a high of 1.9654 before closing the day at 1.9650 in the New York session.
The Australian Dollar (AUD) paired its weekly gains on positive retail sales figures from the US. The AUDUSD traded with a low of 0.8924 and high of 0.9046 before closing the day at 0.8951 in the New York session. Unemployment Rate for the Aussie is out on Thursday morning with forecast expected to be at 4.3%, same as the previous. UPDATE: Unemployment rate at 4.1%.
Gold (XAU) little changed in New York, may fall on speculation a rally in equities will reduce the appeal of the precious metals as alternative investments. XAU traded with a low of 896.00 and a high of 910.00.

Data Supports EUR, GBP

The greenback was mixed in Tuesday trading, falling against the euro and sterling while rallying versus the yen. Economic data from the Eurozone and UK helped support their respective currencies while the US had a dearth of reports in the session. Separately, US equity bourses benefited from Warren Buffett’s announcement to offer support for bond insurers, providing up to $800 billion in municipal bonds. The yen slumped across the board, falling to 107.52 against the dollar and 157 versus the euro as the Dow Jones rallied by over 1.3%.On Wednesday, the US economic calendar picks up with the release of retail sales and Fed Chairman Bernanke’s Congressional testimony. Retail sales are estimated to fall by 0.2% in January extending December’s 0.4% decline. The excluding-autos retail sales are seen edging up by 0.2% from a 0.4% drop a month earlier. Fed Chairman Bernanke will testify before Congress and is expected to reiterate the FOMC’s readiness to support the economy and ease rates further in the face of additional weak US economic data.

Risk Warning

Before deciding to participate in the Forex market, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose. There is considerable exposure to risk in any off-exchange foreign exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or currency pair. More over, the leveraged nature of forex trading means that any market movement will have an equally proportional effect on your deposited funds. This may work against you as well as for you. The possibility exists that you could sustain a total loss of initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin requirement, your position may be liquidated and you will be responsible for any resulting losses. To manage exposure, employ risk-reducing strategies such as 'stop-loss' or 'limit' orders. There are risks associated with utilizing an Internet-based trading system including, but not limited to, the failure of hardware, software, and Internet connection. FOREX.com is not responsible for communication failures or delays when trading via the Internet. FOREX.com employs back up systems and contingency plans to minimize the possibility of system failure, and trading via telephone is always available. Any opinions, news, research, analyses, prices, or other information contained on this website are provided as general market commentary, and do not constitute investment advice. FOREX.com is not liable for any loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. FOREX.com has taken reasonable measures to ensure the accuracy of the information on the website. The content on this website is subject to change at any time without notice.

Investors urged to look beyond ratings

NEW YORK (AP) - For the big three credit rating agencies, growing criticism this past week that their ratings systems are flawed must have sounded like a familiar refrain.
Standard & Poor's, Moody's Investors Service, and Fitch Ratings are being criticized by government officials and some investor groups for not identifying weakness in subprime mortgage-backed securities before they went sour and contributed to massive loss in financial firms and, in turn, the stock market. They're also criticized for having too cozy a relationship with the debt issuers that pay them for their ratings.
This isn't the first time the rating agencies have found themselves under pressure. The beleaguered industry got similar complaints after the collapse of Enron Corp. in 2001, and before that the bankruptcy of Orange County, Calif., in 1994.
In all three situations, ratings assigned to these issuers went from near-stellar to junk almost overnight. As the agencies begin to think about changing the way they do business, analysts say investors must become more vigilant about what debt securities they sink money into -- and not rely solely on what the rating agencies say.
"This happens every other year or so when something shakes up the ratings industry and ends up on the Op-Ed pages," said Martin
Fridson, the former head of Merrill Lynch high-yield research and now proprietor of the specialist firm FridsonVision. "You have to do extra homework, you have to be wary about the way securities are being marketed, and use the ratings that are out there as just a tool."
Investors are plowing more money than ever into fixed-income products, from municipal bonds to exchange traded funds. According to The Securities Industry and Financial Markets Association, a New York-based trade group, outstanding public and private debt underwritten by bonds was valued at about $25 trillion.
Some 10 percent of corporate bonds are held directly by individual investors, while institutions like pension funds hold the rest, according to the group. These securities -- which are more conservative than stocks -- are an integral part of retirement planning and diversifying portfolios during rocky times in the equities market.
Fridson and others say most investors don't hold the kind of opaque asset-backed securities that caused global banks to lose about $130 billion since last year. However, there are certain tip-offs investors should watch for when investing in the fixed-income markets -- no matter what ratings the securities hold.
For instance, he said "one sure guide is to be skeptical if you see something yielding much more than comparably rated bonds." Investors might also obtain fixed-income holdings through investment managers -- like Vanguard or PIMCO -- where analysts scrutinize debt issues beyond just the ratings.
"Over the last six months, a lot of people have learned the hard way that this risk exists -- and that the rating agencies aren't fool proof," said John Flahive, director of fixed income at BNY Mellon Wealth Management. "We've been reminding clients for a long while of the risk, which is why you hire a professional manager that you can use as a safeguard."
Rating agencies, which are regulated by the Securities and Exchange Commission, have been pressured to sell subscriptions to investors for their ratings instead of taking payment right from debt issuers; that, many observers believe, will avoid potential conflicts of interest. Debt issuers seek out higher ratings because that makes it easier to raise money in the capital markets.
And, aside from that, the agencies have already taken some preliminary steps to deflect such criticism and ease mounting regulatory and government concerns.
This past week, S&P said it is aiming to improve governance through measures ranging from establishing an ombudsman's office to address complaints to hiring an external firm for better oversight. Moody's also said it was considering changes in how it rates mortgage-related securities.
But, it has left many on Wall Street asking if this will be enough -- and wonder if the industry itself will begin to shift to other rating models.
"There are people out there right now trying to figure out how to build a better mousetrap," Flahive said. "If I was John Q. Public, I wouldn't feel overly better -- it is going to take more than a few alterations to how the rating agencies are doing things."