Suspicion towards brokers with dealing desks?

Lo everyone,

I’m used to trading in Japan where most of the brokers have a dealing desk. After reading around English forums and such, I found that a lot of people suggest against making an account with a marketmaker because they’re made to profit off your losses.

Two questions

  1. Do non-Japanese brokers not utilize “cover trades” (or whatever the proper term is in English). That is, do they not file orders identical to whatever their clients’s with their liquidity provider so as to cancel out any profits/losses they might make off the results of their client’s trades.

  2. Are there any advantages to using a marketmaker over a NDD broker?

Thanks guys, appreciate the help.

Hi,

I hear this a lot, but think about it, if your broker gives you the price you asked for, and you make gains etc your making them off somebody whether your order goes out to the interbank or not. Now if your a great trader they are going to make losses - so id concentrate on that!!!

A lot of the smaller brokerages tie together small orders and then hedge the risk themselves in the market.

I think you have much bigger things to be worrying about.

At the end of the day no broker can be considered your friend, after all they are in the market to make money through commisions etc.

N

Thanks for the quick reply n_aftab :),

No worries, I’m asking this more out of curiosity than an actual desire to use a broker-dealer.

The curiosity being that the zero-sum game between us and the marketmakers would be pretty obvious. Unless they have some system to assure that our goals aren’t mutually exclusive (via cover trades or a NDD), I can’t see why people would put money in their hands and consider it any better than taking a spin through Vegas.

Market makers will be the counter-party to any/all trades. Thus, the market maker’s profit potential is contingent upon the proportion of losing traders to winning traders. The inherent danger of a small broker being a market maker is obvious. They may not have enough funds to remain solvent in the situation where they take too many losses. This is a true bucket shop. I don’t even believe many of these exist anymore.

An NDD (non market-maker) may exercise the right to be the counterparty but will not when the trade is unlikely to be profitable. They will play their cards in a manner where they eat the unprofitable trades (from the trader’s prospective) and send the profitable ones to their liquidity providers.

However, it’s elephants all the way down. Even the international banks that act as the interbank market (i.e. majority of the liquidity provision) ARE market makers.

So are there no reputable brokers that are market makers? And if there are, do they not cover their trades?

Oanda has a relatively good reputation among market makers, and they fully hedge all of their trades as a whole, but not individual trades. Most market makers operate in this way, its the difference between most brokers and “bucket shops”, which don’t pass your trades to banks, earning money from losses.