What prevents market-makers to do speculative trades with much better conditions than other traders?

External question — Quantitative Finance Stack Exchange Author: Maci0503 Original post: https://quant.stackexchange.com/questions/61259 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Market-makers gain profit from the bid-ask spread. This means that they could place speculative positions without any cost (they pay the spread to themselves = zero cost). I assume there are laws preventing it because if it could happen, the opportunities are far from equal for each speculative trader (I have to overcome the spread while others can trade spread-free). My question in a more concrete way: how many percent of the 7 trillion daily volume in the forex markets is this "spread-free" volume? Can I be sure that some actor paid the spread to another for 100% of the volume, or is there volume that is somehow "spread-free" (I described previously)? Do larger independent actors (e.g. hedge funds, pension funds) pay the full spread, or can they get a discount on it?

External answer — Quantitative Finance Stack Exchange Author: Sergei Rodionov Original post: https://quant.stackexchange.com/a/61261 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Not sure about OTC, but on most exchanges cross-trades where buyer and seller is the same counter-party are not allowed. A market maker that trades with itself would be subject to the same rules, and besides such trades would still incur exchange commissions. Actually the exchanges typically pay market makers [1] to be present in the markets in one way or another. Why bother with faking the trading volume? [1] https://www.nyse.com/publicdocs/nyse/markets/nyse/designated_market_makers.pdf

External answer — Quantitative Finance Stack Exchange Author: Chris Taylor Original post: https://quant.stackexchange.com/a/61263 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. If a market maker wanted to do a speculative trade and get immediate execution, they would need to pay the spread the same as anyone else. On the orders where they collect the spread, they are taking the other side of someone else's speculative trade. To the extent that their counterparties have alpha they expect to lose a bit on these positions, which is part of the reason that they are paid the spread in the first place! If the market maker is willing to wait for a passive fill to get into their speculative position (so that they get paid the spread) they can of course do this, but so can anyone who is willing to use a limit order. A market maker doesn't have any special advantages over anyone else in the market (with some exceptions, like NYSE specialists) -- they are just faster and trade more than most other market participants.