A market maker is a participant whose role in the financial market is fundamentally different from that of ordinary traders.

Market makers are not just active players in the market—they are specialized participants with certain privileges and information to ensure liquidity. Their perception of price dynamics and market processes fundamentally differs from that of regular traders because they operate based on a completely different set of data and analytical methods.

Analysis Methodology: from Horizontal to Vertical Approach

A typical trader usually focuses on historical price charts, technical indicators (RSI, MACD), and classic market patterns. This approach can be called “horizontal”—it is limited to analyzing price and its previous movements. However, forecasts based solely on historical patterns are highly unreliable.

A market maker is a different type of analyst. They apply a “vertical” analysis method, which involves simultaneously studying multiple parameters: current price levels, trading volumes, order flow direction, stop-loss and take-profit settings. Critical for them is information about volume distribution at specific price levels and the open interest— the total of all active and pending orders. This comprehensive approach allows market makers to more accurately assess the actual market condition and its likely direction.

Additionally, market makers often have access to confidential information, which may be distributed among VIP clients depending on their capital size. Classic technical indicators are secondary for them—more important are the real market situation, data on large orders, phases of position accumulation, and insider information of financial, political, or technical nature.

Practical Use of Informational Advantage

Pushing the price in the desired direction is a complex task, but a market maker has a unique opportunity to see trading interest from both sides of the market. For example, upon detecting a large order, a market maker can move the price toward a strong support or resistance level where many pending stop orders accumulate. Triggering these stops causes an avalanche-like acceleration of the price movement in the desired direction.

Thus, a market maker operates both against the crowd and with it—attracting small retail traders’ volumes to move the price in their own interest. However, it is important to distinguish between large and smaller market makers. Institutional players like Deutsche Bank, due to their enormous trading volume, always remain profitable regardless of manipulations. Smaller market makers may face liquidity issues, leading to re-quotes, execution delays, and other difficulties.

Risk Management and Hedging Systems

Market makers use various tools to hedge their risk positions, including futures contracts and options. The algorithms used for hedging are highly complex and, unfortunately, do not always stay within legal boundaries, which sometimes fuels rumors of price manipulation.

Oversight and Regulation: Control over Market Maker Activities

Despite their significant power in financial markets, market makers are under strict control by international and national regulators: SEC, CFTC, NFA, and FSA. A market maker, despite their influence, is required to operate within a strict regulatory framework and under constant supervision. This prevents unchecked manipulation and ensures a certain level of fairness in the market.