Market Maker Brokers: Is It Bad or Illegal to Be a Market Maker?

One of the LuckScout followers, asked me a question that made me write this post. As we always talk against market maker brokers, most traders think it is too bad to be a market maker and it can be even illegal. They wonder if market maker brokers are really bad why there are still too many of them and why it is not illegal to be a market maker.

Before I tell you whether it is bad to be a market maker or not, first I have to explain what a market maker is.

What Is a Market Maker?

There are some complicated definitions over the Internet for this. But I am going to make it as simple as possible.

I am a market maker if you buy and sell currencies with me. To do that you have to contact me and ask for the prices and fees. For example you want to pay Swiss Franc and buy $1000 USD. I tell you that I charge you 900 CHF to give you $1000 USD. You agree and pay me 900 CHF and get your $1000 USD. I hold your 900 CHF until someone else comes and pays another currency to buy CHF from me.

Who is the market here?

I am the market, because you deal with me, not anybody else. So I am the market maker here, because the market is me. I give you the price, I buy from you or sell to you.

Why am I doing this?

I do it for profit. First of all, I charge you a service fee or commission whenever you buy or sell. Second, I make profit from the difference of the bid and ask price (buy and sell prices) which is the spread. Above all, the price I offer you is determined by me. Although it can be too close to the real market price, but it is different because I am free to offer you my own price. Just refer to few different banks in your city and ask for the USD price. Although their prices are so close to each other, but they are different and are not the same. Also the spread they charge you is different.

If the value of the currencies that I hold goes up, I will make a lot of profit, and visa versa. Therefore, I like the value of the currencies that I receive from you to go up, and the value of the currencies that I sell to you to go down. If the opposite happens, I lose money. In the above example, I took 900 CHF from you and gave you $1000 USD. If you come back the next day to give me your $1000 USD and receive your 900 CHF back while the values are changed and $1000 USD costs 800 CHF, then 100 CHF will be my profit because if you give me your $1000 USD I will give you 800 CHF only.

So getting different currencies from people and holding them can be profitable or risky for me.

Is it bad to be a market maker?

Absolutely not. I am offering a service that you need. We are both benefited from this service. I make profit and you get the currency you want. Also if you think the prices I offer or the fees I charge are not fair enough, you can refer to another market maker or dealer. It is your own choice. However, as I have too many competitors, I have to offer competitive prices and fees to attract more customers.

This is exactly what market maker brokers do, with this difference that they offer their service online and you can deal with them through a software which is called trading platform.

It is not bad by itself to be a market maker. It is a service that people need. However, when a market maker tries to cheat its clients to make more profit or prevent them from making profit, it becomes a bad market maker. Sometimes they do this only because they want to make more money (greed). Sometimes they do it because they are afraid of losing money (fear).

Online market maker brokers can deal with thousands of traders through the Internet. As over 95% of the traders lose on their own, market maker brokers make profit automatically without having to cheat their clients. However, sometimes they get greedy and make some tricks that cause their clients to lose faster and easier (e.g. stop loss hunting). Sometimes some other clients make a reasonable amount of profit which is the broker’s loss, so that brokers have to cheat the other clients to become able to pay for the profit the other clients have made.

These actions make the clients unhappy.

Online market maker brokers cheat because they don’t know how to manage and balance between the clients losses and gains. They only make money through the clients losses and this makes them vulnerable to possible big losses when the other clients make profit.

Strong liquidity providers are also market maker, but they don’t cheat their clients. The reason is that liquidity providing is not the only source of income they have. They make money through too many other services they offer. They also participate in too many different investments. The money that floods in their company through liquidity providing for retail traders will not be just hold by them. They use it to offer the other services to the other clients like loans and mortgages, or participating in different investment opportunities. So they make money with the traders money. Therefore, they don’t care even if some traders make profit, because they have already used the money to make profit through the other ways. And of course they also make money when the other traders lose money.

This is how a strong liquidity provider can manage and balance between the losses and gains and remains profitable almost all the time and keep on offering its service. This is what market maker brokers don’t do, don’t know how to do, or are not big enough to do. That is why they have to balance through cheating the clients.

If you make money while trading with a strong liquidity provider, they not only don’t cheat you to make that you lose, but also they appreciate your business because when you take a position, your money will be added to their treasury, and so they can use it instantly to offer the other services or invest with the other companies. They have too many specialists who manage these affairs for them. But most retail market maker brokers cannot afford to do that.

So, it is neither bad nor illegal to be a market maker. It is bad and illegal when a market maker cheats its clients.

Learn more about market maker and ECN/STP brokers:

  1. How Do the Liquidity Providers Make Money and Are They Market Maker?
  2. The Difference of True and False ECN/STP Brokers

Market Maker Brokers Hate Me

Your Forex broker has a very important role in your success. If you don’t choose a proper broker, you will be in trouble. There are two kinds of brokers:

  1. Market Maker
  2. ECN/STP

Unfortunately most traders know nothing about these two kinds of brokers.

When you open an account with a market maker broker, your trades (positions) will not leave the broker’s computers. I mean a market maker broker does not transfer your orders to anywhere out of the brokerage computers and servers. For example when you buy EUR against USD, you are doing it inside the brokerage, and the forex world knows nothing about your position. In fact, you are trading with the broker, not in the forex world. If EUR goes up against USD, the broker has to pay your profit. If EUR goes down against USD and you close your position, the money that is deducted from your account will be in the broker’s pocket.

In other words, trading through a market maker broker is like demo trading. Your orders will not go anywhere, and there is no real order with the real currency market. You just see some numbers that go up and down on your computer screen, and it is the broker at the other side which is waiting for you to lose. Of course in demo trading your don’t risk your real money, but in live trading with a market maker broker, you risk your money. Therefore, trading through a market maker broker is a demo trading that risks your real money.

What Problems Trading with a Market Maker Broker Will Have?

In most cases you will have no problems as long as you are not profitable and you lose money. You will have problems, if you make profit. Making profit takes your account on the broker’s radar screen. A market maker broker doesn’t want you to win, because they don’t want to pay your profit. Your profit is their loss. With some market maker brokers, even when you are not profitable yet and you lose money, they try to make you lose more. They do it through different methods. They know how to do it. I don’t want to talk about these methods in this article. I have seen some articles about it on LuckScout:

Sometimes they can not stop you from making profit and the profits will be added to your account, but you will have problems when you want to withdraw your money. They either make some excuses not to allow you to withdraw, or they simply don’t send your money.

The last thing they do with a profitable trader is that they ask him to withdraw his whole money and close his account. If you ask about the reason, they won’t give you any answer. Or they give you a ridiculous answer. By the way, you have to close your account and go, because you make money and this is what they don’t like. You are a troublesome client for them.

What Are the ECN/STP Brokers?

They are the brokers that route your orders into the forex international market. Their platforms are connected to the big international banks, known as “liquidity providers”. Many of the good ECN/STP brokers are connected to several liquidity providers at the same time, and when you want to take a position they route your order to the liquidity provider that is offering the best price at that moment. This will even lower the probability of any trick and cheating by the liquidity providers, because your orders will be distributed among several liquidity providers, and so they will not have the chance to know “you” as a profitable trader.

So if you want to open a real account, do it with a good ECN/STP broker whose platform is connected to several good and strong liquidity providers.

Also note that some brokers claim to be ECN/STP, but in fact they are not connected to the good and strong liquidity providers. They are connected to another market maker broker. It means they route your orders to a market maker broker. They are ECN/STP electronically and technically (because they transfer the orders out of their own brokerage and computers), but they are market maker brokers in reality, because they transfer the orders to a market maker forex broker. The worst thing happens when both of these brokers belong to the same company.


As I mentioned about, the best solution for the retail broker is working with a true and real ECN/STP broker that routes your orders to the real liquidity providers. However, there is a better solution which is trading through a bank account. The problem is, as the bank don’t offer leveraged accounts, you have to have a reasonably big trading bank account to make reasonable profit.

If you can’t open such a bank account now, you can raise the money through trading the small accounts with true and real ECN/STP brokers for now, until you become able to open a trading bank account. To do that, you have to have a proper trading and living strategy: Trading Strategies Don’t Work If You Don’t Choose the Right Living Strategy

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By The LuckScout Team

I don't believe in luck. I believe in sweat. The more you sweat, the luckier you get.

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