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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 Forex 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. Market Maker Brokers Hate Me
  2. How Do the Liquidity Providers Make Money and Are They Market Maker?
  3. The Difference of True and False ECN/STP Brokers
  4. Electronic Communication Network Or ECN Brokers


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LuckScout
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"Whether you think you can, or you think you cannot, you are right." - Henry Ford

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31 thoughts on “Market Maker Brokers: Is It Bad or Illegal to Be a Market Maker?
  1. Honey says:

    Hey Chris,

    Nice article. It helps us to get rid from confusion. Thanks.

  2. Daniel says:

    “…other services to the other clients like loans and mortgages, or participating in different investment opportunities” so basically you are talking about banks, right?

  3. Singh says:

    Great Article. Appreciate you discussed it in detail.

  4. ff15 says:

    Chris, what would you say is the minimum deposit Liquidity Providers require?

  5. ff15 says:

    Thanks for the answer Chris, I think I need to rephrase my question; if I wanted to open a live account other than with a Market maker broker but a true ECN/STP broker what would be the minimum requirement? Thank you Chris.

  6. ff15 says:

    Thank you Chris! I’m serious about trading and becoming a full-time profitable trader! I will save up to $2000 as you suggested meanwhile mastering the system and being consistently profitable on the Demo. Thanks for all the insights. God bless!

  7. Bashar says:

    Hi chris
    thanks for the wonderful and simple explanation.
    Can a true ECN/STP offer a swap free account (Islamic account)?
    God bless you.

  8. ranjan says:

    Can you please judge the CMC MARKETS. they are money maker. I have an account with them. I found that if you trade index indices they start trading even before market is open and make it impossible to take positions before the market open please advice should I keep my account with them or close.

  9. Ted says:

    Thank you Chris.

    Have you ever experienced a big draw-down since you started trading Chris? When and why? My guess is ‘NO’ but would love to hear from you.

    Ted

    • LuckScout LuckScout says:

      Hi Ted,

      Fortunately I was lucky enough not to blow up any account or lose it because of the sudden forex market movements. Growing small accounts is what I have been doing since the first day I started live trading. So even if I lose an account, it will not be a big loss at all.

  10. victor paul obike says:

    Hi chris, thanks for this article, but pls you really need to do more reviews on true ECN/STP brokers so that we can deduce them and chose from the ones we deems better for our trading so that we dont get trapped by some of those market makers…

  11. Maria says:

    Hi Chris,

    Does true ECN/STP broker always charge commission? Thank you

    • LuckScout LuckScout says:

      Charging commission is the only legitimate way for true ECN/STP to make money. However, some of them prefer to make money through markups (adding to the spread), which is not a good way for two reasons: 1) It widens the spread and makes it harder to enter and exit the market, 2) traders usually don’t know how much markup they have to pay because it is mixed with the market spread.

      A good ECN/STP broker should not add anything to the spread and should have a clear pattern of charging commissions.

  12. Muhammad says:

    Yes market maker bad, but ECN brokers are also not angles because last week an ECN broker eat my account so very careful for choosing right broker .

  13. Sutivserv says:

    Thanks Chris for opening my eyes on price manipulation from some forex broker.
    Yesterday I was selling Eurcad and set my TP on 1.41010 and price reached 1.40828 without triggering my TP.
    Please see attached.

    http://i59.tinypic.com/33otrfk.jpg

  14. Matej says:

    Hi Chris,

    It seems to me that is time when we are train on our demo account perfect to looking for a suitable ECN broker. I’ve wrote an email to the broker where I have opened my demo account and ask them what kind of broker are, and got interesting answer. Almost all their account are ECN although some of them are offering trading with 0,01 lot?? They said that it depends on the bank. What is your opinion? The broker is Admiral Markets. Thanks!

    • LuckScout LuckScout says:

      As far as I know, all the strong liquidity providers don’t support micro-lots. If they have found some liquidity providers that support micro-lots, then I don’t know how they act and whether their service is good or not.

  15. agyusant says:

    hi, chris

    since the candle that formed on 2015.03.04 on usdchf daily chart, i see something strange on usdchf on my chart. then i analyzed that chart… in fact it is not usdchf chart but eurusd daily chart.

    my question: is my broker trying to cheat their clients..??

  16. Michal says:

    Hi Chris
    I want trading only enonomic news. What you think about broker IronFx micro account with fixed spreads?
    Do it is good choice?

  17. Any D Any D says:

    Hi Chris,
    Do you know any market maker broker which honours our stop loss during weekend gaps?

  18. Ivan Todorov Ivan Todorov says:

    Good evening Chris! I read some of yours and Kamel`s about market makers and question come to my mind: Is it possible to see wheter the broker whe choose is market maker or true ECN before we make account with him.And if it is how?

    Thanks once again!

  19. I just started my live account not knowing what market maker is and lost more than half of my money. What you explained and mentioned here and the other articles are what I encountered exactly .Already stop using that broker as soon as I read this article. Thank you so much Chris for your time for these useful articles.They are the best I’ve read so far and help me so mcuh. I was freak out the LuckScout was not accessible a week ago.

  20. what a great article from a man of great honor! thanks dear chris


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