So you hate market maker brokers? There are common misconceptions about them spread around in the industry. The explanation below may change your mind about them.
Traders often vilify market maker brokers. Stop loss hunters, price manipulators, and money stealers; all negative stigma have been attributed to market maker brokers. However, many perceptions circulated among traders about market maker brokers are inaccurate or even downright misleading.
The truth is, a market maker broker isn't always bad. Market makers encompass many kinds of broker types, and No Dealing Desk broker is only one of them. The key is to check the broker's regulations and credibility beforehand. As such, this article will address three important facts about market maker brokers.
Dealing Desk Brokers = Market Makers?
The term dealing desk brokers is often used interchangeably with market makers. However, this is not entirely true. Market makers are the parties that provide liquidity and quote both the buy and sell rates. They can be individuals, brokers, banks, hedge funds, and other financial firms. Large banks in particular are the master market makers.
One simple example of the market-making practice is a foreign exchange transaction in a local bank. This is very similar to the business activity of market makers in forex trading. Let's see the illustration below.
Dolan is in need of USD currency for a trip to the USA. He carries the local currency EUR to Bank Z to be exchanged with USD. In this case, Dolan wants to buy USD and Bank Z makes the market by selling USD and buying EUR.
One month later, Dolan returns home and wants to exchange his remaining USD with EUR. He visits Bank Z again, and this time Bank Z makes the market by buying USD and selling EUR. Here, Bank Z generates profits from the differences between the sell rate and buy rate.
A similar model is practiced by parties better known as liquidity providers and prime brokers in the world of forex trading. Obviously, the scale of their business is far more massive than that of retail brokers. In short, market makers encompass various market participants, and dealing desk brokers are only one of them.
Market Maker Brokers Are Definitely Frauds?
If market makers, unregulated, and offshore brokers are prone to committing fraud, why do many traders still sign up with them? This is where the next misunderstanding about market maker brokers arises. The truth is, forex traders, choose a broker based on needs, not prestige.
If a trader prioritizes the security of their funds, they will register with a highly regulated forex broker with several licenses from top regulatory bodies. If a trader needs precise executions and low spreads, they will register with an ECN broker.
However, what if a trader barely has enough funds? They will look for a broker that offers high leverage and low deposit. Or perhaps what a trader seeks is big bonuses, rebates, or free money as trading funds. For these types of traders, market makers brokers, unregulated brokers, and offshore brokers are their best choices.
Do you know that the famous OANDA which is well-known for its high credibility in the USA, UK, and Canada also use the market maker model? Yes, as a pioneer of nano lot size in forex trading, they proudly announce themselves as a market maker.
It is something that ECN brokers cannot offer. However, we cannot compare this USA-licensed broker with fraud brokers such as MFX Broker, even though both execute trading orders as the counterparty.
Market maker brokers are often portrayed negatively as brokers that purposefully gain profits from traders' losses. Nonetheless, many retail forex brokers that act as market makers are licensed by the NFA/CTFC of USA, FCA of UK, ASIC of Australia and other reputable regulatory bodies, thus they must obey the rules and laws of market makers as stipulated by the regulators.
On the other hand, market maker brokers with offshore licenses or no regulations are more susceptible to committing unscrupulous business activities. Some could be trustworthy, some are questionable.
Market Maker Brokers Are Worse than ECN Brokers?
From our discussion above, you can understand that not all market maker brokers are wicked. We can immediately determine the quality of forex brokers with their regulatory status. The more reputable the regulators, the better the brokers' credibility. However, the classification of brokers as market makers, STP, or ECN cannot be used as the standard to measure their quality.
The majority of forex brokers are hybrids that provide market maker, STP, and ECN conditions all at once. Even if brokers implement the STP/ECN model, their liquidity providers are still market makers. Thus, it is not wrong to say that all forex brokers are basically "market makers". Therefore, based on this label, we cannot determine a broker's quality.
If you do not want to be a victim of scams, avoid unregulated brokers. All unregulated brokers are almost certainly scammers. Sooner or later, traders who become their clients will lose money. If you actually manage to gain profits with them, leave immediately and withdraw all your money before the brokers close their operation.
How about offshore brokers? We can estimate that 50% of them are trustworthy, but the other 50% are not different from unregulated brokers. On the other side, regulated brokers are more credible, but some of them do exploit loopholes in regulation.
So, What Are "Good" Market Maker Brokers?
To safely trade in market maker brokers, you should make sure that they are regulated and has a huge client base. It would be even better if the brokers are reliable in executing millions of trades and consistently earn significant annual revenues that indicate their financial success.
There are many brokerage companies that suit the criteria, but these names are often stated as some of the most popular (if not the best) ones:
- Exness: Known for instant withdrawals and significant growth in volume trading during recent years.
- FBS: Possibly provides the most flexible trading conditions in the industry, and is trusted by millions of traders.
- eToro: A hybrid market maker broker renowned for offering one of the most widely recognized social trading platforms globally.
- AvaTrade: Having amassed a global clients of over 400,000, this company conducts an impressive volume of 2 million transactions per month.
- XM: With the capacity to attract over 5 million clients from around the globe, this company executes an astounding 2.4 billion trades.
- CMC Markets: Recognized as the top market maker broker for forex trading, it generated an impressive revenue of £461.3 million in 2021.
- Interactive Brokers: The go-to market maker for professional traders.
- IG: The parent company recorded an annual revenue of £863.0 million in 2021 and boasts a market value of £2.9 billion.
Brokers can and will commit fraudulent activities regardless of their operating model. This phenomenon is not exclusive to market model brokers alone. For example, a broker may present itself as a Non-Dealing Desk. As it turns out, the broker and its liquidity provider are actually owned by the same person. This scheme enables said broker to actively trade against you without you realizing it.
In short, market makers can be concluded in this infographic.
Judging brokers' quality solely based on their type is not a sensible thing to do. So no matter what type of broker you're about to register with, it's highly recommended to research its track record and check the testimonials first.