Market Maker Brokers – Should You Trade with Them?
Market making brokers are not very well-liked in online trading circles – to say the least. Market makers trade against their own clients, which means that there is a fundamental conflict of interest involved in the equation, one that simply cannot be eliminated as long as the broker remains a market maker.
If you hit the online trading forums and message boards, you will find scores of complaints about various brokers being market makers. Indeed, there are some operators out there who pretend to be ECN brokers while market-making. Such underhanded practices notwithstanding, there are some traders who still trade with market makers, and who still actively seek out the best market maker brokers. This page is obviously directed at such traders.
What exactly is the difference between a “straight-shooting” broker (like an ECN broker) and a market maker though? What is market making?
The broker is but an intermediary who facilitates trading for retail clients, by executing trades (buying and selling securities) on their behalf. Why does one need such an intermediary? The buying of stocks at NYSE is the perfect example: you, the retail trader with say $5k to invest, cannot just walk in there and buy something…you need to go through a licensed brokerage.
The same goes for online trading: a retail trader cannot just Google for someone willing to take the other side of a deal he fancies…he needs a broker to match him up with a counterpart.
For these services, the broker charges a commission.
A market maker on the other hand, is not as much a trade facilitator, but rather, a market participant. What this means is that the market maker is willing to take the other side of your trade and thus effectively trade against you.
Every time the trader loses, the market maker wins. Thus, it is clear that it is in the interest of the market maker to have its clients lose.
In the global markets, market makers fill a useful role: they are there, always willing to sell or buy, provided the trader is willing to get involved for the right price. They create liquidity on one hand and contribute to market efficiency on the other.
As far as online trading goes however, the matching up of individual traders has become much easier.
The problem with market making FX/CFD providers is that they acts as brokers as well as market makers. This obviously incentivizes them to recommend tradable asset categories for which they make market. The trading conditions on such asset classes are obviously less than ideal and usually much worse than anything one will find at a true ECN brokerage.
That said, market makers are here and they are apparently here to stay, despite the best efforts of some authorities to curtail their functioning.
When you trade with such a broker, transparency is of the essence. Reputability is obviously also a major factor to consider.
Hopefully, this list of the best market maker FX/CFD brokers will guide you onto the right path in this regard.
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