Are market makers a scam?

There are millions of traders around the world that think that they have been scammed by the very well-known practices of market maker brokers.

Although if we investigate a bit further, we will realize that also traditional brokers have their problems. However, the sort of problems that we may face in a traditional broker are not as bad as retail, and small traders have found when dealing with shady market maker brokers.

Stock trading scams?

When you trade futures and stocks, your complaints are usually about the services, commissions and not so “important” things.

There are thousands of horror stories on the internet concerning market makers. You only need to go to forexpeacearmy.com, and you can spend hundreds of hours reading countless particular cases there.

Those stories concern even some of the most reputed brokers of the world like Saxo Bank or FXCM.

Although, we have to separate the wheat from the chaff since many stories about brokers are made out of pure ignorance.

CFD trading scams

The majority of brokers that offer CFDs and Forex are market makers.

In the United States, CFDs are not allowed, but Forex is. That is because the main day trading industries of the country, the futures and the stock ones do not want CFDs to get involved with their business, so they lobbied for those instruments not to be implemented. It is not because the SEC wants to keep us from risky trading, since the SEC is very happy seeing how guys with 10 thousand $ get destroyed playing the day trading futures industry.

When Jesse Livermore was alive many of the brokers that offered active trading in all the cities of the United States were market makers, as known as bucket shops.

Livermore could trade any asset there without taking possession of the security, just like now.

Market maker betting exchange

From this perspective, market maker brokers are just betting houses.

They offer the same securities than the real markets with an additional markup in the spread, and some financial costs for longer term bets.

These brokers have enough room to make a decent living out of it. They do not need to do strange things to make money if well managed.

The majority of traders and customers will lose most of the time, and even more when they do day trading, their favorite style. So the customers are happy since they get their adrenaline dosage and brokers are happy too as their cash flow keeps healthy.

Market Makers day trader

The problem with market makers is that they are very engaged in promoting easy money and the apparent success of day traders and the way they make 2000 $ every day.

The adverts promoting that kind of stuff are countless. But to tell the truth, that practice is something that traditional brokers also do, but maybe in a subtler way.

It is clear that there will be some winning customers, but they will be a tiny minority. The brokers today could take advantage of it and separate between the bad and the good customers.

For instance, there was a case involving CMC markets, in which they were accused of separating winning and losing customers in different accounts. Doing it, they kept the money of the losing clients and sent the orders of the good ones in the market, so they, at least, would not lose.

This practice seems to be outrageous, but as for me, I rather want them to do that and leave the good traders doing what they know to do than trying to deceive them through trading tricks. After all, a market maker is not the real market, but a company that “promises” us that it will quote the real markets as close as possible.

You know, betting companies keep their customer loss; that is the reason they exist.

Market makers tricks of the trade

What is very bad is when a gambling house or a maker sees a good trader, starts monitoring him and making it impossible for him to win.

They use chasing stops strategies, re-quotes, freezing platforms and more tricks. Those are practices some greedy brokers have done, and some still do somewhere.

If we are a winning trader, what he has to do in these cases is to move out and try to go to a traditional or bigger broker.

A broker should not (1) care when a customer is making a few thousand bucks. But if a customer has millions; then you should not be trading in a market maker broker, but go to the real market itself.

When we look for a broker, we should look for brokers that are in countries with good regulation, like the English FCA or an EU country. T

he most horrendous stories I have read on the net are those concerning tax haven countries brokers.

I have seen many stories about brokers refusing to send the money to their customers. And if the broker is a small one in the Antilles, there is no much we can do about it, but complain about it on the net. Those sorts of situations are almost impossible to happen in a UK, EU or United States broker.

Market Makers or ECNs?

There is an ongoing trend of so-called new ECN (Electronic Communications Networks), brokers, in which the trades are meant to go to the real market. We could think that these brokers are the real deal, but there is some controversy around this sometimes, for some people claim that a lot of these brokers are market makers lying and pretending to be what they are not.

I think that we should not get too concerned about this issue of ECNs or market makers.

For a small retail trader, there are good ECN and market maker brokers.

As long as you do swing or trend trading there is no much to worry about.

A market maker with a good reputation and located in a well-regulated country may offer us decent conditions to do swing trading.

One of the supposed advantages of ECN brokers is that they usually offer better spreads for forex. Doing that they try to attract day traders, but the fact is that, despite lower spreads, those day traders will lose however. So a moderate and sensible swing and trend trader should not get caught in those things.

A swing trader trading the DAX or the GBPJPY may find decent conditions in both ECN and market makers (fixed spreads) brokers. Just try not to fall prey to the day trading community hype.

 

  • Actually there are brokers that do not accept any customer winning at all, not even a couple of hundred $. Beware of shady and small tax haven brokers.

P.S. This is a personal translation from my spanish blog www.brokerparacompraracciones.com.Thanks for reading and for sharing.

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