Brokers, ahh yes the subject that brings heart palpitations to new Spot Currency traders. ECM, STP, Bucket Shop, Slippage, FINRA, etc. The list goes on, so lets discuss some of this stuff, but before we do I have a bit of mouth running to do.
I have been involved with Spot Currency this since 2004, I have been an introducing broker for 2 different firms, and also have been trading OPM. I was actively engaged as a consultant for the building of a new trading platform, and I had my own live trading internet radio show, by live trading I mean I was trading live with commentary. So I know a lot of behind the scenes and have seen a lot of behind the scenes, some of it cool, some of it not so cool, but all of it done in the chase for Alpha, that elusive Greek alphabet letter. Now if I am mistaken, and you are a verified Analyst/Broker, please feel free to correct me, if not, go away.
So with that lets start.
Market Maker - here is part of the investopedia version:
A market maker is a broker-dealer firm that assumes the risk of holding a certain number of shares of a particular security in order to facilitate the trading of that security.
This is exactly what dealing desk brokers are, they are small size market makes. By holding units of particular currency crosses, they "make the market" for small size trading. Now think of this, on the NYSE, for years there were "houses" that were Market Makers for different stocks, and guess what, the traders dealing with them would curse the market makers for getting bad fills etc. Now there was manipulation involved at times, and if you knew the trader at the IBM desk, and you called in the trade, you might get a better fill than someone off the street. So there is that, but in general things moved along smoothly.
Now that phrase *they assume the risk*_, what does that mean? It means that the MM (market maker) takes the risk off of your head, and what risk is that, the risk that there will be no one out there who wants to buy your 1000 unit ZAR/JPY trade. They provide the liquidity, now obviously they are not a charity so by way of fees and spreads they get paid for this service.
Then we can add the following from Investopedia:
The most common type of market maker is a brokerage house that provides purchase and sale solutions for investors in order to keep the financial markets liquid. A market maker can also be an individual intermediary, but due to the size of securities needed to facilitate the volume of purchases and sales, almost all market makers are large institutions.
Without liquidity the markets will not move or they will move in such a wild fashion that Gasoline could be 10 dollars a gallon today and 50 cents a gallon tomorrow. In fact, if you have studied for your series 3 you would have learned that the only role a speculator plays in relation to the markets is to provide liquidity. This is why 90 something percent of all futures contracts go undelivered, its all speculation, leading to higher liquidity.
So that's what your market maker / deal desk operator does, provides you with liquidity. Now here comes the bad and ugly, Some Dealers in the US have been caught slipping etc. Their customers complained to the NFA and the NFA fined them, if you want to take a look here is the linky - https://www.nfa.futures.org, now with that said some of this went on like 10 yrs ago, so a clear caveat there.
As far as some offshore brokers in Utopia Planitia, well I don't see how you could even start proceedings, or who you would complain to, "in fact it's cold as hell". In the UK and Canada, good governance, other places maybe not so much.
So dear reader Caveat Emptor, due diligence and all that. I will tell you this your broker has to be reliable, it is hard to go against the markets and your broker at the same time.
The Ever Educating VIPER