It’s important to understand that if a particular retail forex broker tells you they are STP or ECN, that only means they must offset your trades with another firm that is a market maker. That’s because market makers perform a necessary function, not only in forex, but in many financial markets, including major stock and futures exchanges. We covered this in more detail in a discussion about how forex brokers execute client orders.
Consider what the world’s largest stock exchange says about how their market model works:
The cornerstone of the NYSE market model is the Designated Market Maker (DMM). DMMs have obligations to maintain fair and orderly markets for their assigned securities. They operate both manually and electronically to facilitate price discovery during market opens, closes and during periods of trading imbalances or instability. This high touch approach is crucial for offering the best prices, dampening volatility, adding liquidity and enhancing value.
DMMs apply their market experience and judgment of dynamic trading conditions, macroeconomic news and industry-specific intelligence, to inform their decisions. A valuable resource for our listed company community, DMMs offer insights, while making capital commitments, maintaining market integrity, and supporting price discovery.
Without market makers, there would be no forex market. That’s why all regulated forex brokers in the US have similar language in their customer agreements regarding market making. Instead of falling for an unregulated broker that may try to mislead you by saying otherwise, it would be better to trade through a well-regulated broker that is open about being a market maker.
In any industry, there is potential for conflicts of interest. That’s why we have regulations to protect consumers when it comes to buying food, cars, medicine, etc. Financial services are no different. Focusing on brokers that are regulated by reputable government authorities can help address your concerns. Key advantages of trading with a well-regulated broker are:
- minimum financial and trading standards they must meet,
- ongoing monitoring by the regulators to ensure compliance,
- a framework for handling complaints from customers, and the
- power to enforce actions against regulated brokers for violations.
For example, the CFTC and NFA set the requirements a broker must meet in order to offer forex trading to US residents. Though not an exhaustive list, this membership application will give you an idea of some of those requirements: Compliance Requirements for Retail Foreign Exchange Dealer (RFED) Applicants | NFA
Particularly noteworthy are the requirements for financial transparency and trade execution accountability. Below is an excerpt from the CFTC site:
The final rules include financial requirements designed to ensure the financial integrity of firms engaging in retail forex transactions and robust customer protections. For example, FCMs [futures commission merchants] and RFEDs [retail foreign exchange dealers] are required to maintain net capital of $20 million plus 5 percent of the amount, if any, by which liabilities to retail forex customers exceed $10 million. Leverage in retail forex customer accounts will be subject to a security deposit requirement to be set by the National Futures Association within limits provided by the Commission. All retail forex counterparties and intermediaries are required to distribute forex-specific risk disclosure statements to customers and comply with comprehensive recordkeeping and reporting requirements.