Market making brokers are not very well-liked in online trading circles. When you hear that a broker is a market maker, you immediately get the idea that this broker cheats its clients.
What is a Market Maker?
A market maker helps create a market for investors to buy or sell currencies. Say for example you want to buy USD 500 with Swiss Franc. The broker will charge you CHF 400 to give you USD 500 and hold the CHF 400 until someone else comes and pays another currency to buy the CHF.
The broker does this for profit. We have previously discussed that aside from commissions and fees, brokers make money through spread – the difference between the bid and ask price. Market makers are free to offer their own prices. They earn profits when the value of the currencies they hold goes up and vice versa.
So is it illegal to be a market maker?
The answer is no. Bear in mind that a market maker provides a service that you need. You get the currencies you want and they profit from it. After all, the decision to transact with such broker is all yours.
Although market makers don’t operate illegally, they are perceived by many as bad brokers because they try to cheat their clients. They do this by taking the opposite of your trades. In short, they want you to lose so they pocket more profits.
When you trade currencies with a market maker, you won’t encounter any problem so long as you’re not profitable. But there are instances when they can’t stop you from making profits. The profits will be added to your trading account, however, they will get to you with a different method – they won’t let you withdraw. They either make some excuses not to allow you to withdraw, or they simply don’t send your money.
The world of Forex is now well-regulated but there are still those who will try to go after your hard-earned money. The solution here is to shy away from market makers and only work with true and real ECN/STP brokers that send your orders to real liquidity providers.