Market Maker Manipulation

Mar 15, 2015Blog, Forex Lessons, Trading Articles

Is it true that the Forex Market is manipulated and controlled by a handful of banks and market makers? If so, how can we identify when they manipulate the forex markets and is it something that requires access to sophisticated tools and secret contacts? Well, let’s begin by getting a few facts straight. Firstly it is true that the forex markets are manipulated and while you don’t need any sophisticated tools or secret contacts to understand how this happens, identifying when it happens is not easy for the majority of retails traders.

What most traders fail to appreciate is what the financial markets truly are and how to trade forex properly. The Forex markets is a place where buyers and sellers come together facilitated by brokers and market makers who look to profit by making a commission for each transaction. Just like any other market, buyers and sellers can only come together if there is a middleman facilitating the transaction. This middleman in the case of Forex is the market maker, and their job is simply to match buy and sell orders for the best price possible and earn the most commission that they can on each transaction.

How forex works – Buyer & Seller Counterparties

Every trade that is executed in the forex markets has to have a buyer and seller and when this takes place then we have a trade. This normally happens in a fraction of a second electronically but in essence, each time you enter a buy trade you are being matched with someone who is happy to enter a sell position and take the opposite side of your trade. If this doesn’t happen then there wouldn’t be a trade. Why is this so important? Because it highlights the problems that large banks have which small traders don’t. Any retail trader is able to place whatever position size they wish into the market without ever fearing slippage or bad fill. Granted slippage may take place during high impact news items such as central bank announcements but on the whole, most of the executed trades are done instantaneously.

Now if you’re a retail trader trading 1 standard Lot then you won’t have any problems with being filled at the price you want. Imagine you’re trading 100 Lots or 500 Lots or 1000 lots, these are larger positions to put into the market at any one time and it’s much more difficult to find someone to take the other side of the trade at the exact price and the exact time that you want and therefore might not be filled at a great price. Well, what could you do in such a situation? You have one of three options:

Option 1:

You could either bite the bullet and get executed at whatever price you are able to get, the only problem here is that you won’t be getting the best price possible for your trade which eats into your profits.

Option 2:

You could wait for the price to get to the price level you want so that you get the best execution possible and buy or sell at a much more favorable price – this is great but what if the price doesn’t get to the level you want for you to execute your trade? You will either be forced to walk away without making a trade or be forced to take whatever price you can get if doing the trade is absolutely essential

Option 3:

You force the price to get to the level at which you want to transact by cleverly manipulating other smaller traders to push the market in the direction you want it to go. Once you get the price to the level you want then you can carry out your transaction. How can you do this? By taking massive positions and exercising your muscle. This is similar to when large companies and conglomerates bully smaller businesses out of the market through aggressive competition.

Best Options…

Which option do market makers and those with large orders take? Option 3. This is how manipulation works in simplicity. The big players who have the money to move the market in the direction they want, do so on a regular basis. What’s more, they have no option but to do this because unless they can manipulate the market then they won’t be able to execute their large orders. Think about it – what causes the price to move up? An imbalance of buy and sell orders such that there are more buy orders than sell orders which means there is more demand for that particular currency pair than there is supply. Conversely, what causes the price to fall – a larger build up of sell orders than buy orders such that supply outstrips demand thereby resulting in price falling. Now if a market maker comes into the market with a massive order to buy a currency, what will happen to the price? It will start to rise. This means that the market maker is bidding the price higher and so forcing himself to keep buying at higher and higher prices until their order is filled. This hardly sounds attractive or even smart for that matter as the market maker is in the business of maximizing their profits.

So what is the alternative?

The only alternative is to buy or sell in a hidden way without alerting all the other traders as to what is really happening. How does this take place? By buying into selling pressure or selling into buying pressure. In other words, what a market maker will do is do the opposite of what they intend to do in order to push the price to their desired level. What is a market maker? It is a financial intermediary set up with the sole purpose of matching buyers and sellers together to make a commission in the process. So let’s say a large European conglomerate wants to buy out a US company for $10 Billion. It can’t just go to a money exchange bureau or the bank to change that amount of money. Most likely it will go to a currency broker or a large bank who will complete the transaction by going into the money markets via their brokerage arm.

Once the market maker receives the order for the transaction, their job is to convert the conglomerate’s money from Euro’s into USD. They will, therefore, be trading the EUR/USD pair and selling Euro’s and buying USD. Since this transaction of selling Euros and buying USD happens instantaneously, what the market maker needs to do is get the highest exchange rate they can for Euros to USD. The way they do this is very important as it affects the amount of commission they stand to make. In this example, it’s in the market maker’s interest to achieve the highest interest rate they can so they do this by driving the exchange rate higher first and then starting to sell the euros against this higher price. They continue to sell just as everyone else is fooled into thinking that price is going to continue higher until eventually they sell all the euros and convert into USD and complete the transaction. What happens now is that since the selling pressure has become stronger than the buying pressure, price starts to fall rapidly and everyone is left scrambling to get out of the trade once they find out that they are wrong. The reason people are left scrambling is that as a result of giving a false signal of the market starting to move up, the market maker manages to entice other traders to start buying heavily. Once the other traders find out that they were wrong in their assessment of market direction, then the main focus becomes to get out of their positions quickly. This is what we call the trap and it happens on a weekly basis in the Forex market.

Now that we know why the forex market is manipulated, how can we identify it? Well to do that we need to pull up a chart and identify areas where the price has moved in one direction only to then aggressively move in the other.

how forex works, forex market maker manipulation example

how forex works, forex market maker manipulation example

how forex works, forex market manipulation example

What Happened?

We see in the chart on the left-hand side that price was steadily heading up and on seeing this, many traders were enticed to buy. What was actually happening is that market makers were bidding price up. Then at the top in circle A we see a consolidation taking place and market makers are using this opportunity to absorb more buy orders. Finally, they push the price out of the consolidation and entice the last remaining buyers who were sitting on the sidelines waiting for a breakout trading opportunity to buy. As soon as the market makers have collected their total amount of orders they then push price down which normally happens aggressively. At this point, all that has happened is that the market maker is doing what they originally intended – sell a large number of orders by creating the number of buyers needed to absorb this order by manipulating the market.

Once market makers have completed their goal in circle A, price falls and continues to do so causing many traders to now think of going short. Market makers continue to push the price down as a result of which they start to entire many traders to now start going short. Sellers come into the forex market more aggressively as they see that the trend is continuing down. At the bottom in circle B, market makers create a consolidation pattern in which they focus on collecting the last remaining sell orders left. This is then followed by a push down to entice any remaining sellers to enter the market. And guess what happens after this? You guessed it…. Price starts heading up, in the opposite direction to what most traders expected resulting in many of them getting stopped out.

So all that’s happened, is that market makers moved the forex market from one point to another by using some clever manipulation techniques which work effectively. It doesn’t mean that it works all of the time because sometimes market makers can work against each other, but one thing is guaranteed – retail traders who are not aware of what is really happening in the forex market when such moves are taking place end up as cannon fodder for the big boys regularly.

To find out how you can avoid being manipulated against and how to trade forex properly, sign up for our Forex Pro trading course where we go through 18 hours of step by step instruction on the whole world of Forex bank manipulation.

Find more great content check out below articles 

Forex Trading Strategy

Stop Hunts & Market Manipulation

Another Stop Run???…

The Trader’s Journey

How To Create A Trading Master Plan 

Day Trading Vs Swing Trading Vs Position Trading – Which One is Best?

Trend Identification

Trading with Fibonacci Part 1: Who And What Is Fibonacci?

Trading With Fibonacci Part 2: Internal Retracements

Trading with Fibonacci Part 3: External Retracements