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Still Dominant Broker Execution Type: Market Maker with Dealing Desk

It was not so long ago that there was only one type of broker available to retail traders of Forex, and it was a market maker (MM) with a dealing desk. Large Forex brokers of today like FXCM came on the scene in 1999, FXDD in 2002, as market makers, and of the hundreds of forex firms that exist today, and the dozens that get born every month, the majority are market makers. In fact, it can be argued that we retail traders still only make up 2% of the overall volume of the Forex market, and most of us are trading with MM brokers. Since it still represents a dominant player on the retail Forex scene, it is best to understand what this broker is, along with some of its intrinsic and historical pros and cons, before we discuss its newer alternatives, STP and ECN brokers, in the following article.

Broad Definition: Market Maker "makes" the market

As their name suggests, the MM broker controls or "makes" the market, and you buy and sell from them, not the global currency market. This broker takes multiple prices from different liquidity providers (usually large banks) and decides which combination suits them, and then they add a pip or 4 to the spread and pass it along to the retail FX trader. Because they are choosing different combinations of prices and adding their spread to it, they are making a market. They create the bid and ask prices you see, and while these prices do reflect the prices of the global currency market, the prices can be manipulated at different times to different degrees, usually in their favor.

Think of the movie The Matrix: we enter this world of FX thinking we are trading the real prices of the global marketplace, when in fact we have entered into an artificial world where the prices are created by the broker, and the dealing desk is comprised of hired traders or dealers (The Agents) or computerized virtual dealer plugins programmed to hedge against us and manipulate the game in their favor. I don't want to sound too conspiratorial, however; without the greed and ingenuity of these MM brokers we would never have been able to play in this big boy arena. What do they get out of it, for being so generous to open the doors to us?

Market Makers Make Money on Spread

Market makers always make money on the spread, the ask price minus the bid price. The banks themselves usually have a small spread built into the currency quotes, and usually a forex broker will add a mark-up to this spread as a way of earning money from us. But since a MM broker does not route client orders to the banks as would a STP or ECN, it gets to keep most of the spread for themselves.

How does a market maker determine the spread they deliver to us?

They will markup the average spread discovered in the interbank market to a point that maximizes their own profit while still being competitive with the rest of the retail forex market. Before 2007, when the retail forex market was still in its infancy, relatively speaking, MM brokers could easily get away with fattening up the currency quotes to 3-10 times what they would see at the interbank rate, depending on the currency. Thus, if the typical bank spread on EURUSD is 0.3-0.5 pips, then the typical MM broker pre-2007 could get away with charging 3-5 pip spread, keeping most of it for themselves, as they never had to route the order directly to the bank. After 2007, when the numbers of retail forex brokers started to climb into the hundreds, with many of the newcomers trying to bring in clients by offering tighter spreads, there began a gradual tightening of the spreads across the board.

Spread competition amongst retail brokers has dramatically lowered spread costs for us, while MM brokers are still able to profit handsomely. Today the typical MM broker may not be able to get away with a 3-5 times spread fattening, but they can still get away with a 1.5-3 times spread fattening, so if the typical bank spread on EURUSD is 0.3-0.5 pips, the typical MM broker can get away with charging 1.5-3 pips. It is better now that spreads are lower by half than what they were a few years ago, but they can still go much lower.

Market Makers Make Money on Our Losses

It is important to note that MM brokers take the opposite side to every trade you make and thus earn money when you lose, in addition to the markup on the spread. If your currency trade goes in your direction, and you make money, your broker has to pay you from their pocket; if the trade goes against you, and you lose money, your loss is their profit. Since it is an established fact that over 95% of traders lose, most market maker brokers end up making a mint from the trading losses and mistakes of their clients, in addition to the money they make from the spread. 

Now here comes the crux: if the self-interest of the MM is having their client lose, and the risk to the MM is having a client win big, how does the MM deal with potential winning clients?

How to Differentiate Winners from Losers: Client Profiling

Taking the opposite side of client order transaction is the MM's dealing desk, which is able to profile their clients.

These brokers can profile traders and split them into groups of winners and losers, putting the majority 95% "losers" on auto-execution, while dealing with the threat of the 5% "winners" in two ways: 
  1. They can offset the risk by putting your trade (through their name) onto the Interbank market to reduce the risk and protect their net exposure
  2. They can flag your account # and IP address, and engage in a number of different dirty tricks (widening spread, slowing or freezing executions, and stop hunting) to make you lose more often, as we shall explore. They can employ human "dealers" to manipulate the market in various subtle ways, or else have these manipulations automated within virtual dealer plugins of the MT4 platform itself, to further tilt the odds in their favor and make sure that even the good traders do not win as often or as big as they would like to. 
In the worst case scenario, the dealing desk can split clients into groups and put less successful ones on auto-execution and trade against them because on average they will lose, while clients that show signs of successful trading will be put on "slow-down" mode and can be provided with frequent re-quotes, slippage and/or slower execution especially during fast moving markets while a broker tries to offset own risks. We will examine the possible cheating tactics of MM brokers below.

How to Tilt Winning Odds in their Favor: MM Rules and Manipulations

Below are some of the options available to market makers to tilt the winning odds in their favor.

MM Broker Tactics
Description Dealer or
Virtual Dealer Plugin (VDP)
1. Forbid Trading
Forbid certain types of trading (particularly scalping and arbitrage) and traders (particularly winners) Dealer
2. Widen Spread
Widen the spread at different times by different degrees; Dealer & VDP
3. Delay Execution
Delay execution (or create connectivity interference), resulting in re-quotes & off-quotes, which in turn result in no fill or fill with slippage; Dealer & VDP
4. Stop Hunting Engage in stop loss hunting; Dealer

Let us examine each of these practices in turn. 

1. Forbid certain types of trading (particularly scalping and arbitrage) and traders (particularly winners)

While it is true that 95% of traders lose in trading, there is always hope that traders can beat the odds if they could build or purchase a scalping EA that is shown to be 90% or more profitable in 10+ years of backtesting, as well as many forward months of demo trading. In the world of MT4, there came about a number of famous free and commercial EAs that did in fact demonstrate excellent backtesting and forward testing. In late 2009 it seemed that one could make a small fortune with a number of different scalping EAs during the Asian session, and many traders began to open up different broker accounts to trade these EAs. When brokers found they were losing too much money taking the other side of these then profitable scalping EAs, they began to forbid in unison the trading of scalping EAs, making up rules and definitions of what scalping is, while also morally justifying their action by suggesting that scalping or arbitrage was tantamount to stealing and banks don't like it. Even if the broker was slow to publish the prohibition against scalping or arbitrage, it could still prevent the trader from making a withdrawal of his profits, on that ground that the profits were the result of scalping activity and therefore prohibited by the broker. 

However, because scalping became so popular an activity in the MT4 world, clients began to search for brokers that would allow scalping. Thus there came about many market maker brokers that allowed scalping, but they could employ other internal tools to turn even the best scalping systems into account killers. 

2. Widen the spread at different times by different degrees.

At any given time, a broker can increase the spread for the currency pair, making it much more difficult to make money on that pair. For instance, there was a time in 2009 and the first half of 2010 when many scalping EAs could make good money trading the EURCHF and EURGBP pairs during the Asian session when these pairs tended to be more range bound. When the brokers started seeing many traders win with these Asian scalpers, as they began to be called, many flicked on the spread widening feature on these pairs during the Asian session, which in effect doubled their spread during that session; when the average spread of these two pairs increased from 2-3 pips to 4-6 pips, these Asian scalpers became net losers instead of net winners.

MM brokers had also targeted news traders with the spread widening feature. Some traders had been able to make decent money trading off the sudden increase in volatility following a high impact news announcement, but these traders were eventually hit hard by the sudden widening of the spread by two or three times its former size during the news release. If clients complained the standard answer was that the banks themselves were widening the spread, and while the banks might have done so to some degree, the MM brokers were greatly exaggerated this widening in their own favor.  

Once clients discovered that certain brokers had widened their spreads on these pairs during the Asian session or during news releases, the die-hard fans of Asian scalpers and news trading began to search for brokers who did not widen spreads as much. However, even when they found the brokers with better spreads, they discovered an even more insidious trick a broker could play.

3. Delay execution (or create connectivity interference), resulting in re-quotes & off-quotes, which in turns results in no fill or fill with slippage. 

When you are a scalper or trade with a scalping EA, two requisites you need are low spread and fast execution. Sometimes a broker will lure you into trading with them with their low published spread. You may even have traded a demo account for some time with that broker and find that their scalping EA works very well on these low spreads. You then assume things should work the same on a real account and so open one up. Unfortunately, you discover the real doesn't perform nearly as well as the demo. What you did not figure on was the manipulation of execution speed and fill that MM brokers with dealing desks have the ability to do.

Brokers have various internal plugins to delay the execution by X number of seconds. Clients have complained of various execution delays, sometimes 5 second delays or more, with orders being rejected and rejected again 3 or more times until the client gets a very bad order entry if any at all. Similar delays can happen when you try to exit the order. For example, the trader clicks BUY EURUSD @ 1.3750, and broker has 5 seconds (with the 5 second delay built into the internal plugin) to choose a higher price to fill the client, and if the price kept going down instead, the broker can still fill the trader at @1.3750. Or, if your trade is losing by 5 pips and you decide to quit it, you click close but the price keeps going against you and you get re-quoted 3-4 times until you have lost - 10 pips. Thus you are hoping that you can get in and out of your trades at the quoted prices, but because of the execution delays and re-quotes, you suffer a slippage problem that tacks on more pips to the spread you see. This switch to more delays is usually made after you demonstrate that you can consistently win with your method or EA. Clients have complained that they have made money on a small account with a profitable scalping EA until the account grew and then they suffered many re-quotes which made the EA no longer profitable with that broker.

In addition to creating execution delays resulting in re-quotes and slippage, a broker may also create connectivity issues that result in off-quotes and no fill.  You may get a message saying "off quotes" or another funny message saying that "trade context is busy". It used to be that the off-quotes problem occurred during times of extreme volatility, such as during a news event. At the exact moment of a high impact scheduled news announcement like the Non-farm payrolls, the platform jitters and freezes, goes offline temporarily, and it is hard to enter or exit your positions at the moment and price you desire. Moreover, the spread is increased dramatically during the release to make it even more difficult to make a profit. Nowadays, clients have complained of not being able to close profitable trades, that they often get re-quotes, even off-quotes, even during normal traffic times. They complain that the MT4 is blocked or frozen or re-quoted until their trade is no longer profitable and they are in a losing position.  

While these execution delays and connectivity issues maybe legitimate at various times for various reasons, when they occur frequently only when you are successfully scalping or news trading, then you know the broker is out to get you. These delays, re-quotes and connectivity issues cause execution delay and slippage, and this slippage steals more profit from the winning positions and adds more losses to the losing positions, creating more losing trades and less winning trades. Eventually the trader discovers over time that his strategy or EA is still making a nice upwards equity curve on his demo account while it is steadily demolishing his real account because of broker manipulations. 

4. Engage in Stop Loss Hunting.

Did you ever fear that your broker is out to get you or that your stops are being hunted down, even though the market is ultimately in your favor? Well, you could just be paranoid, but if you are trading with a market maker, your fears could very well be justified. Stop hunting is considered a sport in London, as well as NYC, at numerous bucket shop forex firms. There are two forms of stop hunting. 

Stop Hunting #1. Market maker brokers can increase the probability of hitting your stops by the sudden increase of the spread when the market is close enough to the stop loss. For instance, if you have set your stop loss on EURJPY to 108.50 on a short position, and you expect the spread to be 3 pips, the broker can increase the spread to 6 pips when the market nears your stop, which would effectively take you out at 108.44, three pips sooner than normal. You will find your position is closed with a loss and it will not have the chance to turn around and change to a winning position.

Stop Hunting #2. Brokers know where your stops are because you have told them. When a large number of stops accumulate in an obvious area, say 10 pips below a recent swing low, a market maker can go into the real FX market and places a large order to move the price down, essentially wiping out a decent amount of stops before exiting, while the price continues on its journey back in the direction of the trader's former positions. 

Stop hunting is always difficult to prove, and most brokers deny it if challenged. However, it has been reported about enough times by enough clients on different broker review sites to suggest that it is a common, dishonest practice engaged by market maker brokers. 

Given the above four manipulations (scalping restriction, spread widening, execution delay and stop hunting), market makers can easily reduce the 5% winning traders to 1%. Scalping, as we have seen, is virtually impossible to engage in with market markers.

Three Forces that are Working Currently to Reduce the Above Manipulations:

  1. Increased Competition
  2. More Sophisticated Client Profiling
  3. Regulatory Oversight
Let us briefly examine each one.

1. Increased Competition.

Ten years ago when the retail forex industry was in its infancy, relatively speaking, firms could feel that they could get away with MM manipulations because at that time, it seemed everyone was doing it. Ten years later, however, with hundreds of forex firms competing for client money, one way that newer firms have sought to stand out was by being honest and transparent. In a world gone bad honesty stands out and clients flock to the virtuous companies like bees to pollen. Thus a MM company can choose to not use dealer intervention or the virtual dealer plugin as much as its counterparts and gain a reputation amongst the community for being more transparent.
Moreover, there has been the growth of alternative execution technologies like STP and ECN that have sought to do away with the dealing desk and route orders directly to the liquidity providers. In doing so, they can supply a tighter spread to their clients, as well as instant execution without delay and re-quotes. As STP and ECN brokers live only on spread and commission, and not on betting against the client, so they have incentive to help the client survive and continue to trade as their client. In order to compete against STP and ECN brokers, the MM brokers have had to offer up equivalent advantages, that is, tighter spreads and faster executions without as much dealing desk or virtual dealing desk interventions like spread widening, order delaying and stop hunting.

Forex online communities and review sites have become more sophisticated with time, allowing traders to rate and review different brokers, catching and publishing their dirty tricks to the rest of world. MM brokers that continue to the use their bag of dirty tricks get quickly spotted and downgraded in ratings. While a few anecdotal experiences and comments may not give a clear idea of the reputation of a broker, when you have hundreds of them posted in various places online, you can get a better idea. It behooves each new forex client to take the time to review all the comments made on a particular broker over its lifespan to gather up enough anecdotal evidence to make a more balanced decision on the broker's reputation, good or bad. Most MM brokers will have poor reviews and ratings, but there might be some that stand out, and there might be some that have changed their tactics, evolving to be more honest in recent times.

2. More Sophisticated Client Profiling

Earlier in the article I mentioned that MM brokers profile their clients, putting the majority of "losers" on auto-execution while dealing with the "winners" two ways: 1) putting winner's traders (through their name) into the interbank market to reduce their risk and protect their net exposure, or 2) hampering the winner's account with dirty tricks (spread widening, execution delays, stop hunting). Back in the day, when client profiling was less sophisticated, it was harder to determine who was going to be a winner, and thus it was easier to auto-execute against the majority of clients and employ the dirty tricks on the emerging winners. Now that the broker stats tools and client profiling software has become more sophisticated, they are able to better differentiate the winning and losing traders and can easily switch the winning traders over to the interbank market to reduce their risk and protect their net exposure. The client profiling and switching mechanism is now more heavily time tested and automated to ensure greater success for the MM broker, without the need to rely as much on the dirty tricks.

3) Regulatory Oversight

Ideally, a good regulator will hear a number of complaints from clients about a broker cheating them and then launch an investigation with more power and money behind them than any one client could launch on his own. Sure, there are plenty of regulators out there that do nothing and sit on their hands, or act too late to do anything, but there are some that are decent.

As much as I dislike the NFA for protecting the financial interests of the establishment, I do like them for sometimes acting to protect the financial interests of the little guy. Not long after the NFA came on board with the task of regulating the forex industry in the US, it announced that it would launch an investigation involving all 16 member firms to find out whether they cheat their clients, as reported by Michael Greenberg in forexmagnates.com:

The National Futures Association says it will begin analyzing trades executed by its 16 member forex firms. The regulator will search for signs these firms are designing computer systems to take advantage of what’s known in the industry as “slippage” — small price movements that happen between when a customer orders a trade and when that trade is actually executed. While some slippage is normal (currency prices naturally fluctuate 24/7), the NFA will be looking to see if trades are being executed only when the currency price moves in the firm’s favor. This would indicate a firm may be violating NFA rules mandating fair business practices, says spokesman Larry Dykeman. The group can then assess fines, and in some cases may suspend or expel a firm from membership in the organization.

Those with good memory will remember that only 6 months ago [on July 2, 2010], Gain Capital was slapped with $459,000 fine for abusing its Virtual Dealer plugin and configuring it to unfair trading settings. The plugin was configured to accept client orders when slippage moves unfavorably against them and reject client orders when slippage goes against Gain Capital.

Virtual Dealer plugin and the likes are pure risk management and dealing programs. These programs make a good job at reducing brokers’ risk by accepting or rejecting orders without broker intervention and according to preset configuration. The main idea behind these plugins is to protect the broker from being exploited by certain traders who will try to gain pips they shouldn’t gain when they give an order hoping that by the time the order is accepted by the broker the market already moved a pip or two in their favor. This obviously makes it not trading but exploiting loops in brokers’ systems. On the other hand, brokers (some would even say that most brokers) exploit the configuration of these plugins and set them to only accept orders when the market moves against their clients thus profiting a pip or two against a client in almost every trade. When you add those pips up you get quite a nice, zero risk, daily profit for the broker. NFA is concerned exactly with this.


We have to give thanks here to the fact that we wee traders probably would not have been able to enter this formerly big boy club of Forex without the greed and ingenuity of market maker brokers who were the first to open their doors for us to play in this arena. They welcomed us with inviting arms, allowing us to trade with low account minimums and high leverage in their artificial and manipulated trading environment. Sure 95% of us lost because forex is a difficult and dangerous game that requires a number of factors in order to win (experience, knowledge, system, trading plan etc.). But what most people did/do not know is that in addition to the spread these MM brokers charge us, they also profit from our loss, which becomes an incentive for them to keep us losing, even when we start to get smarter and trade with profitable systems or EAs. To prevent us from winning, they employed human dealers as well as virtual dealer plugins to manipulate our trades (increase the spreads, delay the execution speeds, and hunt our stops) in their favor, which makes us lose more of our money to them despite our best efforts. 

Then many of us did finally take the red pill and rebelled against the Matrix of the Market Makers with their dealing desks deployed against us by demanding more direct and transparent routing technologies. We did not want to be part of a market maker or dealing desk where the broker takes the other side of the transaction and thus bets against us, increasing his profits and odds of winning with unfair tactics of spread widening, execution delay and stop hunting. In response to increased competition and more demand for honesty, as well as the stick hanging over their heads from more watchful regulatory agencies, many MM brokers have curtailed their use of cheating tactics and instead opted for more sophisticated client profiling techniques, so that they can better differentiate potential winners from losers and route them more directly to the interbank market.

Thus, it is possible to find a well-established Dealing Desk broker with a good reputation for not engaging in the above activities. The transparency and honesty of a Dealing Desk broker depends on the rules inside the company, which we as clients see transpire in their actions towards us. You should try to investigate the reputation of the broker, reading through the forums and broker review sites to see if they have a history of misdealing's with their clients, or if they are instead trying to run an honest ship. Moreover, it is possible to find some that have decent spreads. If you are not engaged in scalping and trade more as swing or position trader, you may not have to worry as much about super-fast fill and razor thin spreads, and may instead like other things that these brokers tend to have that can be attractive to smaller clients, such as lower account minimums, higher leverage, funding bonuses etc. 

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