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Market maker – forex broker

The forex broker classified as a market maker, is probably the one most forex traders are familiar with, and is the type of broker most widely used by retail traders for one simple reason. All their services are free, and this is how the forex industry has been marketed over the last few years, allowing unscrupulous and shady brokers to draw in an ever increasing number of naive and ill informed traders into the speculative world of currency trading. With no central exchange, and with little in the way of regulation, these practices continue, and a quick search in any of the $orex tradingums will reveal a host of traders complaining bitterly about a variety of malpractices, all of which continue on a daily basis. Whilst some of these comments are no doubt as a result of the traders own mistakes, many are not, and simply reflect the increasing levels of manipulation and sharp practice, which is now a hallmark of the $orex market>

This is not to say all forex brokers classified as market makers are the same, they are not, and just as in any industry there are the good, the bad and the ugly. However, the underlying principle of a ‘free’ service engenders an environment which encourages market manipulation and conflict issues at all levels in the industry, and until the market is more closely regulated, will continue unabated. Furthermore, the NFA which regulates many of the forex brokers in the US, is contemplating changes to the leverage that brokers may offer their clients, with the proposal that 1:100 leverage is the maximum allowable for a retail trader, in sharp contrast to the absurd leverages currently being offered by some brokers at 1:400, guaranteed to wipe out any client within minutes rather than days or weeks. It is even being suggested that the minimum leverage may be cut further to 1:10, which has horrified many ( not me I hasten to add, as I believe 1:50 should be the maximum leverage anyway). At the time of writing these proposals are still under review, but many of the more reputable market maker brokers have notified their clients accordingly, and reduced the leverage on their forex platforms accordingly. Unfortunately these proposed safeguards to protect retail traders from themselves, have had the unintended consequence of more offshore brokers appearing in an attempt to circumvent the new regulations, adding a further layer of risk to the account, with no regulatory protection in the case where a broker simply goes bust. So whilst all these attempts to regulate and control are laudable, they have little effect at present on the underlying problems in the industry, and indeed some could argue that they have made matters worse in some respects!

Market maker forex brokers

So what is it about a market making broker that is so underhand, and it is perhaps the illusion that as everything is free, you are trading on a level playing field, which is patently not the case. First, the market maker is getting his feed from the interbank market, but then re-quoting you, generally with a fixed spread, with his or her margins built in to the price. Secondly, whilst the broker is standing as counter-party to the trade, and is therefore obliged to take your order and match it with an opposing order, this is not passed into the interbank market for matching purposes, but held by the broker. As a result you are then trading directly against the forex broker which is where the conflict of interest arises. The broker will now be in a very strong position and has two choices to make – either hedge your trade, or trade against you. Forex hedging is standard trading practice and a perfectly legitimate way to conduct business. Trading against you is not, although you will probably never find out for sure. Should the broker decide to trade against you, then he will almost certainly take out your stop loss at some point, delay quotes, allow slippage in quotes, freeze the trading platform in high volatile trading conditions, and finally move scalping forex traders to manual transactions which allows the broker full control over order fills and execution. All of these tactics are employed at different times, all because the retail trader refuses to pay commissions on forex trading, because it has been marketed for so many years as commission free trading. One day everyone will wake up and realise what is happening in the industry, but until then, here are a list of the advantages and disadvantages of using a market maker forex broker for your $orex demoount, and forex account.

Advantages of the market maker broker

  • Simple forex trading platform
  • Free forex charts and trading news feeds
  • No commission charges on trades

Disadvantages of the market maker broker

  • Broker may trade against you
  • Fixed spreads
  • Forex rates may differ from the forex real time rates
  • Scalping trades restricted  or not allowed
  • Spread slippage
  • Price manipulation and stop losses triggered
  • Price spreads will be worse than from an ECN

So, having looked at the market maker forex broker, let’s look at the next group which is the NDD or Non dealing desk broker.