Traders often talk about market makers, almost as if they were mythological figures.
But they are more than real and also very important components of today’s market, however many seem unaware of this.
Being a successful retail trader requires a very strong awareness of who is on the other side of the trade, which often means competing with the market makers.
To be able to profit in a market populated by such level opponents, you need to know their strengths and weaknesses.
There are a lot of differences between retail traders and market makers. In this article, we will discover the two main ones and shed some light on the whole concept.
Who are the market makers?
First of all, we need to clarify who these figures truly represent.
Market makers are the liquidity providers. They are very useful figures that make the trading process faster and easier.
They help in creating for investors an instantly responsive market and in facilitating the operations by taking the other side of the trade.
Do you remember the “market maker” orders in your crypto exchange such as limit orders? It’s the same concept, but here we discuss not a type of order, but an entity.
Dumb note: That doesn’t mean that market makers do only market maker orders.
Market makers are usually financial institutions and large banks, but can also be large individual investors. They often work with brokers (i.e. intermediate figures) and provide the liquidity for their brokerage firm.
Sometimes the broker can also be the market maker: in that case, they are not very intermediate anymore. This can be true with cryptocurrency exchanges that provide leverage, for example.
The successful retail trader knows that either by using a market maker broker or intermediate broker, he is going to compete against market makers for the most anyway.
This happens because the quickness of the services he uses depends largely on the instant liquidity provided by the market maker. In other words, he buys from the market maker and sells to the market maker.
In market maker broker/exchanges, this process is even more assured to be true.
If you want to deepen into the concept, here is a perfectly described page about the market maker.
What is the influence of the market makers?
As you may have already guessed, market makers have a lot of impact on the environment.
They represent the restricted group that owns the largest percentage of capital.
This means that their influence is much more powerful than expected. Having the possibility to occupy most of the supply and demand, their actions will play a major role in the price development.
However, this has its advantages and obstacles. It’s their knowledge that makes it a huge edge.
One of the obstacles that they incur is the absence of liquidity to operate their orders. Because of their capital, they cannot simply put an order and wait to be filled.
To get enough liquidity to match their capital, they need to calculate where the majority of retails will place the opposite trade.
In simple words, they need to place their buys where all the retails will place their sells, and vice-versa. In this clever way, they will have enough liquidity to fill their orders, plus very likely the market will move in their favor.
For example, when the market maker buys all the sell orders, the market will respond to the absence of sell orders (supply) with an increase in the price.
This is not as easy as it may look, and it requires a lot of knowledge, consciousness, and discipline. To be such a trader, you must have completely prevailed over the weaknesses you have as a human being when engaging with the markets.
Are market makers bad people?
Being a market maker does not classify them as demons who kill the desires of other people to feed their greed. Anyway, not all market makers work to liquidate retails.
There is no such thing as good or bad in the world. This is a conditioned invention caused by human weaknesses.
In every process of life, there is a winner and a loser, when you look at it as a competition.
Everything in life requires something that “loses” and something that “win”. In reality, they are just action and reaction making their job. From an unconditioned point of view, both negative and positive outcomes are JUST, because they contribute to existence.
What makes the human think that either one is good or bad solely is his conditioned state of mind, which is dependent on what he thinks are his values and conveniences.
As a successful retail trader, you must internalize the principle of JUSTNESS. This will help you understand that nothing is given for free and everything is deserved. Moreover, it will be clear that a true desire can NEVER be threatened.
Start looking to winners as people who deserved to win. Analyze why they won, what they needed to master and accomplish to reach that position — because there’s always something to accomplish.
Likewise, start looking to “losers” as people who deserved to “lose”. Analyze why they lost, and what they still need to learn so they can compete at the same level.
Truly, there are no losers. There are winners and learners.
Don’t be a loser, be a learner, then become a winner.
The two big differences between retail traders and market makers
Surprisingly, the truly biggest difference is not capital at the end of the day. As it was explained in this article, every kind of capital has its difficulties and advantages.
The biggest differences are in the mindset, as always.
The market maker loves to increase his edge, the retail loves to increase his risk
Here comes a bad trader saying: So what? What’s wrong with increasing risk? Risk is cool.
Excessive risk is going to neutralize the edge. Most retails do not have an edge strong enough to sustain all that risk.
But the point is — the average retail trader loves to increase his risk. He exchanges the pleasure to feed his greed, with the annihilation of his edge. To every action, there is a reaction.
Market makers’ business is very intelligent. All is calculated, nothing is left to chance, very little is given to risk.
They don’t want to increase their risk, they keep it very low. They increase their edge, and they work hard for that.
As a successful retail trader, you don’t increase your risk — you increase your edge.
A trader who wants to increase his risk is feeding his greed, hence he is happy with his weaknesses.
The market maker has patience, the retail is anxious
Market makers have a good relationship with Time: it is their friend. Verily, Time is the friend of all successful traders.
Time is what decides who is right and who is wrong because you can’t say if you’re either one until Time responds to you. Likewise, whoever speaks the language of Time, knows the answers for material growth.
The market maker is aware of that, and he can see with a wider sight over the environments. He calculates his risk to represent what he can sacrifice until Time responds.
The average retail trader is a whole other story: he wants to get results quickly, he has no respect for Time.
As he is conditioned with this state of mind, he unconsciously thinks that the immediate results are the important ones. This happens because his mind is programmed to expect important results in little time.
Whatever happens to him in the short term, it becomes a matter of life and death. As a consequence, he loses his perception of Time and increases his risk.
The inverted perception
Being unable to see Time as it really should be seen, the only thing remaining for the retail to reach his success is the risk, and he uses plenty of that.
For the average retail trader, the risk is no more insurance for Time — it becomes the supposed source of success. When he wants more success, he increases his risk.
In the average retail mind, the risk becomes the edge.
That is a distorted condition, because in reality risk represents the negative outcome. The average retail has transformed the negative outcome into his success. And he gets it.
As a summary, we can say:
The market maker sees risk as insurance to wait for Time to do its job, and use the edge to grow his capital.
The retail trader sees Time as insurance to wait for risk to do its job, and use the risk to grow his capital.
But he eventually doesn’t realize that risk represents the negative element and he will grow the capital in the negative direction. In other words, he will lose everything.
As a POSITIVELY successful trader, you want to have the same patience that the market makers have, and realign your perception with your desired outcome.
In conclusion
To be a successful trader is much more than getting support and resistance right.
Behind trading, there are a lot of things that need to be internalized and mastered in order to succeed.
One of these things is knowing the role of market makers in the environment, as well as their influence and the impact of their actions.
Understand that market makers are necessary figures and they are not bad ones — they are just competing as you are.
The main differences belong in the mindset — how they perceive time and how they enhance their edge instead of their risk.
In simple words, they know how to use their advantages and how to neutralize their difficulties.
Become a learner, learn from the winners, then evolve into a winner.
It is much recommended to read the next article on this concept, The Market Maker’s Edge: How To Compete As A Retail? (OUT ON MONDAY 05/09/2022)
Everything described in this article has the sole purpose of being informative and providing general information. The author has no intention of providing any financial advice, legal advice, or tax advice. Do not rely on this article to make investment decisions. Seek professional help before making any such decision. The author does not take any responsibility for loss or damage of any nature. The use you make of the information contained in this article is your sole responsibility.