As a popular strategy, scalping is quite controversial. One of the reasons is brokers' restrictions on traders who implement the strategy. Is it normal or just another scheme from cheating brokes?
For scalpers, it's useless to choose a broker with low spreads and fast execution if they tend to limit scalping. But isn't scalping just another strategy to find opportunities in the market? Why do brokers have to restrict or even ban scalping altogether? The following discussion may not fully cover the reason behind it, but there are some points that will make you realize why such brokers feel the need to adjust their trading policy for scalpers.
Risk of Overloading the Server
This is the most common answer that is usually given when traders ask why brokers limit scalping practices. If you consider the principle of scalping, which is executed by opening many positions in a short time, this is quite reasonable. Aggressive scalpers can even open multiple positions within minutes.
If many scalpers perform that action several times a day, the broker's server can be overloaded. Such a situation can cause the price chart to crash, pending orders canceled, and positions not executed properly. These things can lead to countless cases of traders filing complaints due to significant losses.
Depends on the Broker's Type
The explanation above is convincing, but you may need to check on the broker's type to normalize it. An NDD (No-Dealing Desk) broker has no reason to prohibit scalping, considering the broker will connect client orders directly to the real market, not processing them in the 'broker-made market'. Clients in this type of broker should not be capable of overloading the server because their orders are delivered to the market.
In contrast, a Market Maker or Dealing Desk type broker distributes and executes client orders in their own market. Market Makers are also suspected of hedging their traders' positions. If many traders scalp, their system will be quickly overwhelmed, so they try to mitigate the risk by restricting or even banning the practice of scalping.
Is every broker not allowing scalping a Market Maker? The answer, of course, is yes. However, that doesn't mean you can judge a broker from their scalping policy alone. What you need to know is that not all Market Makers explicitly ban scalping. Those who are trusted, experienced, and committed to serving their clients with the best condition usually have solutions to deal with risks that come from their clients' scalping.
There are currently so many forex brokers that are probably Market Makers but allow their traders to scalp without minimum to no restriction. Tight competition between brokers inevitably pushes them to find ways to avoid server overload problems due to the high number of orders that scalpers execute. So if you come across a broker that still bans scalping explicitly, it's better to avoid it since it can be considered a Market Maker with no sense of competitiveness nor commitment to put traders' needs on priority.
How to Check Broker's Policy on Scalping
To detect a forex broker's policy on scalping, look for information on the broker's official website. The freedom of trading with scalping is a feature that is often considered an attraction. So, it is normal for brokers to put it on their official webpage, particularly on parts where traders can find the information easily. Suppose a broker does not provide any information about scalping policy, you can ask directly to the customer support. Check whether scalping is really allowed without restrictions or only allowed under certain conditions.
Is it normal for brokers to disallow the use of scalping? The exact answer depends on the type of forex broker you choose. Suppose the broker claims to be an STP/ECN (Non-Dealing Desk), then the scalping ban imposed by the broker is unreasonable. However, if your broker is confidently promoting as an NDD or a hybrid, opposing scalping can be quite normalized for they want to avoid server overload.
Nevertheless, it's best to be careful when trading with such a broker because usually, the interests of Market Makers conflict with those of the traders'. If your condition allows you, look for an STP or ECN broker that does not have any restrictions on forex scalping. Then, make sure the broker provides low spreads and fast execution to support your strategy.