For the market maker (MM), the market is perceived differently than for an ordinary trader. A trader often analyzes price using indicators, levels, and patterns, focusing on past dynamics. This limits his capabilities, as forecasts based solely on historical data do not always hold true. The trader sees only a 'horizontal' analysis — price and its history, without considering other factors that influence the current situation.
The market maker, in turn, analyzes the market 'vertically' — he pays attention not only to price but also to volumes, direction, order types, and parameters such as StopLoss and TakeProfit. The dynamics of volumes at specific price levels are important to him; he sees all market and pending orders (open interest) and considers how and when to close positions. This information allows him to more accurately assess the current state of the market and its possible direction. Additionally, the market maker may provide some information to VIP clients depending on the size of their capital.
The market maker ignores traditional technical indicators such as RSI or MACD, as what matters to him is not only the past price trend but also the 'real' situation in the market. Information about large orders, accumulation of positions, and insider (financial, political, or technical) allows the market maker to more accurately predict price movements.
How does the market maker use information?
Reversing the price in the market is not a simple task, but the market maker has the ability to see trading interest from both sides of the market. He can manipulate the price by forming false trends or sudden corrections. For example, with a large order, the market maker can direct the price towards a strong level where pending orders or a large volume of stops have accumulated, which will trigger the 'execution' of these orders and accelerate the price movement in the desired direction.
Thus, the market maker works both against and with the crowd, attracting small volume to move the price in his interests. It is important to understand that large players, such as Deutsche Bank, are not interested in manipulating small orders — they are always profitable due to the huge volume of transactions. However, smaller market makers may face liquidity issues, leading to problems with order execution, requotes, and other unpleasant situations.
How does the market maker hedge risks?
Market makers also use hedging their risks by applying operations in futures markets, for example, with futures or options. Hedging algorithms are complex, and they are not always legal, which sometimes leads to rumors of price manipulation. However, it is important to note that the activities of market makers are strictly regulated by international and national authorities such as NFA, FSA, SEC, and CFTC.
Despite their power in the market, the market maker operates within strict rules and under the supervision of regulators, which excludes uncontrolled manipulation.
