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Market Maker Brokers: Is It Bad or Illegal to Be a Market Maker?

January 23rd, 2015 byLuckScout TeaminTrading and Investment

One of the LuckScout followers, asked me a question that made me write this post. As we always talk against market maker brokers, most traders think it is too bad to be a market maker and it can be even illegal. They wonder if market maker brokers are really bad why there are still too many of them and why it is not illegal to be a market maker.

Before I tell you whether it is bad to be a market maker or not, first I have to explain what a market maker is.

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There are some complicated definitions over the Internet for this. But I am going to make it as simple as possible.

I am a market maker if you buy and sell currencies with me. To do that you have to contact me and ask for the prices and fees. For example you want to pay Swiss Franc and buy $1000 USD. I tell you that I charge you 900 CHF to give you $1000 USD. You agree and pay me 900 CHF and get your $1000 USD. I hold your 900 CHF until someone else comes and pays another currency to buy CHF from me.

I am the market, because you deal with me, not anybody else. So I am the market maker here, because the market is me. I give you the price, I buy from you or sell to you.

I do it for profit. First of all, I charge you a service fee or commission whenever you buy or sell. Second, I make profit from the difference of the bid and ask price (buy and sell prices) which is the spread. Above all, the price I offer you is determined by me. Although it can be too close to the real market price, but it is different because I am free to offer you my own price. Just refer to few different banks in your city and ask for the USD price. Although their prices are so close to each other, but they are different and are not the same. Also the spread they charge you is different.

If the value of the currencies that I hold goes up, I will make a lot of profit, and visa versa. Therefore, I like the value of the currencies that I receive from you to go up, and the value of the currencies that I sell to you to go down. If the opposite happens, I lose money. In the above example, I took 900 CHF from you and gave you $1000 USD. If you come back the next day to give me your $1000 USD and receive your 900 CHF back while the values are changed and $1000 USD costs 800 CHF, then 100 CHF will be my profit because if you give me your $1000 USD I will give you 800 CHF only.

So getting different currencies from people and holding them can be profitable or risky for me.

Absolutely not. I am offering a service that you need. We are both benefited from this service. I make profit and you get the currency you want. Also if you think the prices I offer or the fees I charge are not fair enough, you can refer to another market maker or dealer. It is your own choice. However, as I have too many competitors, I have to offer competitive prices and fees to attract more customers.

This is exactly what market maker brokers do, with this difference that they offer their service online and you can deal with them through a software which is called trading platform.

It is not bad by itself to be a market maker. It is a service that people need. However, when a market maker tries to cheat its clients to make more profit or prevent them from making profit, it becomes a bad market maker. Sometimes they do this only because they want to make more money (greed). Sometimes they do it because they are afraid of losing money (fear).

Online market maker brokers can deal with thousands of traders through the Internet. As over 95% of the traders lose on their own, market maker brokers make profit automatically without having to cheat their clients. However, sometimes they get greedy and make some tricks that cause their clients to lose faster and easier (e.g. stop loss hunting). Sometimes some other clients make a reasonable amount of profit which is the brokers loss, so that brokers have to cheat the other clients to become able to pay for the profit the other clients have made.

Online market maker brokers cheat because they dont know how to manage and balance between the clients losses and gains. They only make money through the clients losses and this makes them vulnerable to possible big losses when the other clients make profit.

Strongliquidity providers are also market maker, but they dont cheat their clients. The reason is that liquidity providing is not the only source of income they have. They make money through too many other services they offer. They also participate in too many different investments. The money that floods in their company through liquidity providing for retail traders will not be just hold by them. They use it to offer the other services to the other clients like loans and mortgages, or participating in different investment opportunities. So they make money with the traders money. Therefore, they dont care even if some traders make profit, because they have already used the money to make profit through the other ways. And of course they also make money when the other traders lose money.

This is how a strong liquidity provider can manage and balance between the losses and gains and remains profitable almost all the time and keep on offering its service. This is what market maker brokers dont do, dont know how to do, or are not big enough to do. That is why they have to balance through cheating the clients.

If you make money while trading with a strong liquidity provider, they not only dont cheat you to make that you lose, but also they appreciate your business because when you take a position, your money will be added to their treasury, and so they can use it instantly to offer the other services or invest with the other companies. They have too many specialists who manage these affairs for them. But most retail market maker brokers cannot afford to do that.

So, it is neither bad nor illegal to be a market maker. It is bad and illegal when a market maker cheats its clients.

Learn more about market maker and ECN/STP brokers:

Your Forex broker has a very important role in your success. If you dont choose a proper broker, you will be in trouble. There are two kinds of brokers:

Unfortunately most traders know nothing about these two kinds of brokers.

When you open an account with a market maker broker, your trades (positions) will not leave the brokers computers. I mean a market maker broker does not transfer your orders to anywhere out of the brokerage computers and servers. For example when you buy EUR against USD, you are doing it inside the brokerage, and the forex world knows nothing about your position. In fact, you are trading with the broker, not in the forex world. If EUR goes up against USD, the broker has to pay your profit. If EUR goes down against USD and you close your position, the money that is deducted from your account will be in the brokers pocket.

In other words, trading through a market maker broker is like demo trading. Your orders will not go anywhere, and there is no real order with the real currency market. You just see some numbers that go up and down on your computer screen, and it is the broker at the other side which is waiting for you to lose. Of course in demo trading your dont risk your real money, but in live trading with a market maker broker, you risk your money. Therefore, trading through a market maker broker is a demo trading that risks your real money.

In most cases you will have no problems as long as you are not profitable and you lose money. You will have problems, if you make profit. Making profit takes your account on the brokers radar screen. A market maker broker doesnt want you to win, because they dont want to pay your profit. Your profit is their loss. With some market maker brokers, even when you are not profitable yet and you lose money, they try to make you lose more. They do it through different methods. They know how to do it. I dont want to talk about these methods in this article. I have seen some articles about it on LuckScout:

Sometimes they can not stop you from making profit and the profits will be added to your account, but you will have problems when you want to withdraw your money. They either make some excuses not to allow you to withdraw, or they simply dont send your money.

The last thing they do with a profitable trader is that they ask him to withdraw his whole money and close his account. If you ask about the reason, they wont give you any answer. Or they give you a ridiculous answer. By the way, you have to close your account and go, because you make money and this is what they dont like. You are a troublesome client for them.

They are the brokers that route your orders into the forex international market. Their platforms are connected to the big international banks, known as liquidity providers. Many of the good ECN/STP brokers are connected to several liquidity providers at the same time, and when you want to take a position they route your order to the liquidity provider that is offering the best price at that moment. This will even lower the probability of any trick and cheating by the liquidity providers, because your orders will be distributed among several liquidity providers, and so they will not have the chance to know you as a profitable trader.

So if you want to open a real account, do it with a good ECN/STP broker whose platform is connected to several good and strong liquidity providers.

Also note that some brokers claim to be ECN/STP, but in fact they are not connected to the good and strong liquidity providers. They are connected to another market maker broker. It means they route your orders to a market maker broker. They are ECN/STP electronically and technically (because they transfer the orders out of their own brokerage and computers), but they are market maker brokers in reality, because they transfer the orders to a market maker forex broker. The worst thing happens when both of these brokers belong to the same company.

As I mentioned about, the best solution for the retail broker is working with a true and real ECN/STP broker that routes your orders to the real liquidity providers. However, there is a better solution which is trading through a bank account. The problem is, as the bank dont offer leveraged accounts, you have to have a reasonably big trading bank account to make reasonable profit.

If you cant open such a bank account now, you can raise the money through trading the small accounts with true and real ECN/STP brokers for now, until you become able to open a trading bank account. To do that, you have to have a proper trading and living strategy:Trading Strategies Dont Work If You Dont Choose the Right Living Strategy

How Do Liquidity Providers Make Money and Are They Market Makers?

The Swiss Franc Tsunami: Who Is Affected and How Often Are We Going to Witness Such Disasters?

Some Forex Trading Facts and Myths You Must Know

Forex Leverage: How Leverage Works in Forex, and, Is It Your Friend?

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The Difference of True and False ECN/STP Brokers

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Nice article. It helps us to get rid from confusion. Thanks.

other services to the other clients like loans and mortgages, or participating in different investment opportunities so basically you are talking about banks, right?

Great Article. Appreciate you discussed it in detail.

what would you say is the minimum deposit Liquidity Providers require?

Brokers have an account with them that covers the minimum margin brokers clients need to open their positions.

Thanks for the answer, I think I need to rephrase my question; if I wanted to open a live account other than with a Market maker broker but a true ECN/STP broker what would be the minimum requirement? Thank you.

Some of them allow $500 as the minimum account, but that is too small. I think you should start with a $2000 account.

Thank you! Im serious about trading and becoming a full-time profitable trader! I will save up to $2000 as you suggested meanwhile mastering the system and being consistently profitable on the Demo. Thanks for all the insights. God bless!

thanks for the wonderful and simple explanation.

Can a true ECN/STP offer a swap free account (Islamic account)?

No, they cannot, because liquidity providers charge the swap.

Can you please judge the CMC MARKETS. they are money maker. I have an account with them. I found that if you trade index indices they start trading even before market is open and make it impossible to take positions before the market open please advice should I keep my account with them or close.

What you say about them doesnt sound good. So there is no reason to hold your account with them.

Have you ever experienced a big draw-down since you started trading? When and why? My guess is NO but would love to hear from you.

Fortunately I was lucky enough not to blow up any account or lose it because of the sudden market movements. Growing small accounts is what I have been doing since the first day I started live trading. So even if I lose an account, it will not be a big loss at all.

Hi, thanks for this article, but pls you really need to do more reviews on true ECN/STP brokers so that we can deduce them and chose from the ones we deems better for our trading so that we dont get trapped by some of those market makers

Does true ECN/STP broker always charge commission? Thank you

Charging commission is the only legitimate way for true ECN/STP to make money. However, some of them prefer to make money through markups (adding to the spread), which is not a good way for two reasons: 1) It widens the spread and makes it harder to enter and exit the market, 2) traders usually dont know how much markup they have to pay because it is mixed with the market spread.

A good ECN/STP broker should not add anything to the spread and should have a clear pattern of charging commissions.

Yes market maker bad, but ECN brokers are also not angles because last week an ECN broker eat my account so very careful for choosing right broker .

Thanks for opening my eyes on price manipulation from some broker.

Yesterday I was selling Eurcad and set my TP on 1.41010 and price reached 1.40828 without triggering my TP.

In short positions, price has to go lower than your target to cover the spread, otherwise your target will not be triggered. Read this:

It seems to me that is time when we are train on our demo account perfect to looking for a suitable ECN broker. Ive wrote an email to the broker where I have opened my demo account and ask them what kind of broker are, and got interesting answer. Almost all their account are ECN although some of them are offering trading with 0,01 lot?? They said that it depends on the bank. What is your opinion? The broker is Admiral Markets. Thanks!

As far as I know, all the strong liquidity providers dont support micro-lots. If they have found some liquidity providers that support micro-lots, then I dont know how they act and whether their service is good or not.

since the candle that formed on 2015.03.04 on usdchf daily chart, i see something strange on usdchf on my chart. then i analyzed that chart in fact it is not usdchf chart but eurusd daily chart.

my question: is my broker trying to cheat their clients..??

I want trading only enonomic news. What you think about broker IronFx micro account with fixed spreads?

Unfortunately I dont have any experience with this broker. If they offer a fixed spread, then they are market maker.

Do you know any market maker broker which honours our stop loss during weekend gaps?

No broker either MM or ECN does it. Please read this:

Good evening! I read some of yours and Kamel`s about market makers and question come to my mind: Is it possible to see wheter the broker whe choose is market maker or true ECN before we make account with him.And if it is how?

I just started my live account not knowing what market maker is and lost more than half of my money. What you explained and mentioned here and the other articles are what I encountered exactly .Already stop using that broker as soon as I read this article. Thank you so much for your time for these useful articles.They are the best Ive read so far and help me so mcuh. I was freak out the LuckScout was not accessible a week ago.

what a great article from a man of great honor! thanks dear

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