A dealer bank or other institution is likely to be undertaking various kinds of foreign exchange trading—making markets, servicing customers, arranging proprietary transactions—and the emphasis on each will vary among institutions.Market making is basic to foreign exchange trading in the OTC market.
The willingness of market makers to quote both bids and offers for particular currencies, to take the opposite side to either buyers or sellers of the currency, facilitates trading and contributes to liquidity and price stability, and is considered important to the smooth and effective functioning of the market. An institution may choose to serve as a market maker purely because of the profits it believes it can earn on the spreads between buying and selling prices.
But it may also see advantages in that the market-making function can broaden in an important way the range of banking services that the institution can offer to clients. In addition, it can give the market-making institution access to both market information and market liquidity that are valuable in its other activities.
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