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Market-makers gain profit from the bid-ask spread. This means that they could place speculative positions without any cost (they pay the spread to themselves = zero cost). I assume there are laws preventing it because if it could happen, the opportunities are far from equal for each speculative trader (I have to overcome the spread while others can trade spread-free).

My question in a more concrete way: how many percent of the 7 trillion daily volume in the forex markets is this "spread-free" volume? Can I be sure that some actor paid the spread to another for 100% of the volume, or is there volume that is somehow "spread-free" (I described previously)? Do larger independent actors (e.g. hedge funds, pension funds) pay the full spread, or can they get a discount on it?

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  • $\begingroup$ How do you think the spread is paid to the market makers? $\endgroup$
    – Bob Jansen ♦
    Feb 19, 2021 at 7:17
  • $\begingroup$ The buyer pays the ask price, while the seller sells for the bid price. Usually, ask>bid, and the market-maker gets the difference. My question is that, what if the market-maker is on the buyer/seller side, this way they could initiate speculative positions without the cost of the spread (they could place a market-order cost-free because the spread is paid to themselves). $\endgroup$
    – Maci0503
    Feb 19, 2021 at 7:42
  • $\begingroup$ As a speculative trader, how can I compete with these cost-free market-orders (if it really could happen), bacause I have to pay the full cost for my market-orders (spread + commission)? $\endgroup$
    – Maci0503
    Feb 19, 2021 at 8:30
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    $\begingroup$ Why don't you use a limit order? $\endgroup$
    – Bob Jansen ♦
    Feb 19, 2021 at 8:31
  • $\begingroup$ Market-orders have the advantage of immediate execution. Look, I don't have problems with the spread itself, two independent participants can agree to pay a cost to the third (the market-maker). But it seems to be very problematic if one buyer/seller participant is the market-maker itself. I don't know if it could happen and how it is regulated. $\endgroup$
    – Maci0503
    Feb 19, 2021 at 9:12

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If a market maker wanted to do a speculative trade and get immediate execution, they would need to pay the spread the same as anyone else.

On the orders where they collect the spread, they are taking the other side of someone else's speculative trade. To the extent that their counterparties have alpha they expect to lose a bit on these positions, which is part of the reason that they are paid the spread in the first place!

If the market maker is willing to wait for a passive fill to get into their speculative position (so that they get paid the spread) they can of course do this, but so can anyone who is willing to use a limit order.

A market maker doesn't have any special advantages over anyone else in the market (with some exceptions, like NYSE specialists) -- they are just faster and trade more than most other market participants.

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Not sure about OTC, but on most exchanges cross-trades where buyer and seller is the same counter-party are not allowed. A market maker that trades with itself would be subject to the same rules, and besides such trades would still incur exchange commissions. Actually the exchanges typically pay market makers [1] to be present in the markets in one way or another. Why bother with faking the trading volume?

[1] https://www.nyse.com/publicdocs/nyse/markets/nyse/designated_market_makers.pdf

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