Your points highlight why it’s a good idea to trade with a well-regulated forex broker. Regulation by a reputable financial authority goes a long way to addressing a lot of the concerns you raised.
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 a quote from the CFTC site:
The final forex rules put in place requirements for, among other things, registration, disclosure, recordkeeping, financial reporting, minimum capital and other business conduct and operational standards. Specifically, the regulations require the registration of counterparties offering retail foreign currency contracts as either futures commission merchants (FCMs) or retail foreign exchange dealers (RFEDs), a new category of registrant. Persons who solicit orders, exercise discretionary trading authority or operate pools with respect to retail forex also will be required to register, either as introducing brokers, commodity trading advisors, commodity pool operators (as appropriate) or as associated persons of such entities. “Otherwise regulated” entities, such as financial institutions and SEC-registered brokers or dealers, remain able to serve as counterparties in such transactions under the oversight of their primary regulators.
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 and RFEDs 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.
That’s why it’s important not to blame market makers for the problems caused by bad brokers. Not all market makers are bad. Not all bad brokers are market makers.
If your forex broker is not a market maker, then it must offset your trades with another firm that is a market maker. That’s because market makers provide a vital function, not only in forex, but in many financial markets, including the major futures and stock exchanges.
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.
Full disclosure: FOREX.com is a market maker, but that’s not why we defend this model. Rather, we are a market maker, because we believe market making is the best way to provide our clients with reliable pricing while effectively managing our own risk. We are fully accountable for every execution and don’t outsource that responsibility to a third party.
It’s not our intention to make this discussion about ourselves, but anyone who has questions about us specifically is welcome to send us a private message or post in our discussion thread in the Broker Support section of BabyPips.