A lot of people, especially those who have experience in the markets, think that it is not a good idea to open an account with market maker brokers.
Those who are new in the Stock Market world do not usually have a clue what a market maker is.
This is not usually a problem in the stocks and futures markets, where brokers follow a traditional model in which those products trade in centralized and very specialized markets.
In those cases, stocks and futures brokers do not have interest in that the customer loses. The counterparts to the customer trades are other traders and big market makers and dealers (1).
The only interest of those brokers is that the customer trades a lot.
The more contracts or stocks the customer buys the better for the broker is. This is obvious since those brokers follow a commission based on “sales”. That is why the brokers promote day and frequent trading so much.
For instance, most brokers, at least in Spain, give lower commissions for those stocks opened and closed in the same session.
The brokers know that the vast majority of customers lose in the long run.
The cost of transactions, which are commissions and spread, is so brutal that most day trading strategies are doomed from the beginning (2).
When you add execution problems and slippages, then the average life of a day trading account in a leveraged product is not often longer than a few months hopefully.
The customer, on the other hand, will have had a lot of “fun” for many days. Not much different that if that customer spends that money in another vice. The sensation of trading the biggest markets in the World, and seeing himself with a possibility of “making it”, is priceless.
To know you have to experience it.
The problem is that, at the end, when there is no money, the depression comes.
It is not much different from other addictions.
CFDs and Forex Market Makers.
The problem about market making in the retail industry has worsened the last couple of decades with the introduction of CFD and Forex brokers.
This kind of brokers has democratized the market due to their great flexibility, something that allows traders to negotiate in markets they could not before.
However, to be able to enjoy that flexibility, the traders will have to pay some price.
Small retail traders know they cannot trade the oil or DAX futures because they lack capital to do so. But they know they can manage contracts much smaller than those.
They also know that conditions will be worse than those of future and stocks, with bigger spreads and financing costs. And they accept it.
The problem lies in that the great majority of scams and problems derived from bad practices de during the last years have come from the companies working in the OTC Markets (Forex, CFDs, binary options).
I do not know why; bet there seems to be a trend indicating that some of those companies do not like seeing money deposited from customers going back to them.
There are terror stories about it, although some of them are not true.
There is a lot of spam negative marketing there.
Although I know something about it.
Honest market makers?
Albeit I do not consider that all CFD and Forex market makers are scams. On the contrary, we can find very good and honest brokers, like Oanda, IG Markets, et cetera.
In principle, there is no problem if we open an account in a Market Marker broker if we do not deposit a huge amount of money.
That is to say, if I have 100.000 dollars or pounds, it is better to open an account with a traditional stock or futures broker, or a very good regulated ECN one.
Even if we have the sort of 10.000 dollars, we should think very well in what broker we are going to open the account.
For instance, if we choose to do CFDs, and our account is of around 20.000 pounds or euros, it is better an ECN, MDA or STP broker with a minimum commission in stocks. In this way, trading there should be very similar to that of traditional stocks.
The same we can say for Forex.
If I want to open a 1.000 or 2.000 euros account any EU, UK, USA or Australian regulated broker will be fine, even if it is a market maker.
With this I do not mean that we should not be fine with market maker brokers.
However if we manage important amounts, the best thing will be to trade with brokers that resemble the traditional stock markets.
To learn, practice, try strategies, etcetera, market marker brokers are fine.
When the amount of our deposit grows, we should look for other alternatives.
In the end, if you have a generous portfolio, the best offer is still that of traditional stock brokers, which being not very cheap, are actually the safest ones. We will not see strange things with the normally. Although we can also find problems and scams there.
The world of investing and trading is, after all, very complicated.