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Chapter 10: FX trading at the big end of... > Market makers and price discovery

Market makers and price discovery

What we mean by ‘price discovery’ is that the marketplace is the place where buyers and sellers want to trade their side of a transaction. Given that the ‘grade’ of their transaction is clear (their currency), all that the FX market really serves to do is provide a ‘price’. This is where market makers come in. Market makers are almost always banks, and their job is to provide a price to the market. In that process, an FX currency price is revealed or, in other words, ‘discovered’.

To be considered a market maker, a bank must be prepared to quote a two-way price (a bid and an offer). Their bid is the market maker’s ‘buying’ price, and their offer price is their selling price to all other enquiring market principals, whether or not they are market makers in that particular currency. The price rates are quoted over the telephone, electronically via digital dealing platforms or, less frequently nowadays, by telex to dealers in other countries.


  

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