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After listening to my free Tips on Trading video series at http://www.youtube.com/profile?user=ForexCoachingPros&view=videos or on my website at www.forexcoachingpros.com , many people want to know more about Market Makers, ECN Brokers, and how to choose a fare Forex Broker.  They also want to know whether or not it is possible to trade successfully with a Market Maker, a retail Broker who will offer them higher leverage than an Electronic Commerce Network (ECN) Brokers.  Let me elaborate on these matters.

 

First of all, yes, it is challenging, but still possible to trade successfully in the artificial trading environment created by Market Makers, more with some than with others, who create or “make” their own market.  From hence comes their name, “Market Makers,” all of whom offer trades from their own liquidity pools, instead of from the true inter-bank market.  However, Successful trading with a Market maker is more challenging and of higher risk.  To trade successfully with these retail Market Makers or with any counter trading Broker or their liquidity provider who, in a conflict of interest, controls the trade platform they provide to the trader, requires an understanding of the counter traders position, their financial motivation, their self-preservation tactics, and how to best compensate for them.  Only with this knowledge, together with a proper knowledge of trading, can the trader learn to win enough of the time, and for long enough, to become a successful trader in the artificial Forex market provided by counter trading brokerage services, whether through their personal dealing desk or directly through the dealing desk of their liquidity provider.

 

Of course, since the client’s/trader’s trading successes are the counter trader’s or Market Maker’s losses, the higher the account leverage offered to the trader from the counter trader/Broker, the greater the risk for that Broker, and therefore, the more tactical interference that Broker will create in order to protect his interests. If you are among the few who are still successful enough at high leverage trading, despite the usual tactical sabotage from the Market Maker, most, if not all Market Makers will eventually resort to more drastic measures to protect their interests, even if they end up being threatened with complaints to the National Futures Association (NFA) which could result in an investigation for unethical or dishonest Broker Dealer practices.  No Broker wants an investigation, so this is how the Brokers more drastic self-preservation methods will likely unfold.

 

The successful account is flagged as a high risk account.  With this account, the Market Maker will go so far as to strategically interrupt the data-feed signal to delay trade closes for seconds or minutes.  Instead of cutting signal, sometimes the Broker will lock up the trading platform, entirely.  This prevents active winning trades from closing at significant market turning points in a profit, and allows the Market Maker to force the winning trade into a losing position before unlocking the platform so that it must be closed out at a loss, sometimes even a margin call.  Either of these methods, among others, is very profitable to the Broker. 

 

If and when the trader complains, the Broker will likely claim that it is due to freak or periodic liquidity issues that are beyond his control and that the client must accepted this as part of the risks of trading the Forex.  The Broker hopes that the trader will fall for this lie, accept responsibility, and give up the fight, which is exactly what most naive traders do.  If that deception doesn’t work, then the broker may claim that there is nothing that he can do about it, hoping still that the client will still give up the fight.  Many do just that.  For those clients who still persist, he may try to accuse the client of using some kind of an unethical trading edge and that that he simply cannot allow unethical clients to be successful, or to trade any longer with their firm.  If the client is now persistent, angry, and smart enough to threaten filing a claim with the NFA, the Broker will likely shift his tactical position to negotiating a settlement, offering a small fraction of the amount lost, in stead of the prospect of wading through a long drawn out investigation from the NFA that may or may not result in a favorable decision for the trader.  Most remaining traders cave in at this point and accept some kind of offer to make an adjustment to their account, restoring 10 to 30 percent of their loss.  After all, the Broker will reason with the client, if you are good enough to get this far with your account, then you could build it all back again faster, and much more, before you would ever get an answer to your complaint to the NFA, right?  Wrong! 

 

This might all make perfect sense, accept the trader is somehow never able to experience the same kind of result with that broker service, either due to tactical maneuvering from the Market Maker to prevent success, or by a combination of that, and the new emotional interference in the mind of the trader who is never able to completely mentally accept the injustice of the settlement. Eventually, the trader finally realizes that the Broker new at the time of the settlement that this client/trader’s account would forever more be flagged as a high risk account, to be regularly sabotaged, never again to be allowed to become so successful. 

 

Of course the Broker will have also had the trader sign a release, waiving the Broker of all responsibility, and even promising to never speak of this “freak” or “unfortunate” incident, and of the settlement, to anyone else.  This probably also includes a clause agreeing and to never file a complaint about the incident to the NFA. Alas, the complaint to the NFA would probably have been a more profitable choice, even if the investigation did take many months.  Then again, greater persistence may have resulted in a much higher settlement offer from the Broker, perhaps even a full restoration of the losses in question to the traders account.  Now that the client has capitulated, the Broker must now decide whether or not to continue allowing the client to trade an account with his firm.  If he decides to allow the client to continue trading, it is only because the Broker wants a chance to get his settlement money back.  Frankley, it is better to take your money and go somewhere else.

 

With this in mind about the nature of the Market Maker, once you are able to build a sizeable enough account with a market Maker, it is best to transition to an ECN Broker.  The ECN Broker does not take the counter trade position against you. This changes their incentive to do all they can to help you become a long lasting successful trader. Your long and successful trading experience is how they will make more money.  In a few cases, their are ECN Brokers, or their Introducing Brokers (IBs), who will allow rather small initial account sizes, offering mini accounts with 10K unit sizes with fractional lot trading for flexibility.  ECNs make a spread fee and a commission valued at about 1 extra pip per trade in the market, but their commission, in addition to their more reasonable spread rate, is still well worth it.

 

You must watch out, however, for those Market Makers who attempt to present themselves as ECN Brokers by claiming to have no dealing desk, and to not take the counter trade position against you.  Some of these retail Brokers are still Market Maker like wolves in ECN sheep’s clothing.  They sub-let or delegate their Market Maker tactics to another, or they simply choose to represent their liquidity provider’s interest who is the one really offering the trade and who also controls the trade platform, spread rate variations, and the power to manipulate the trade platform and the artificial market against the trader, by design, to sabotage their trades.  Don’t be fooled.

 

Now, some of the most reasonable existing ECN Brokers, in order of the lowest account sizes available, are the following:

 

1. www.mbtrading.com  ($400+)

2. www.efx.com  (IB for mbt $500+)

3. www.pfgbestdirect.com  (IB for pfg $1,000+ for my students)

4. www.atcbrokers.com  (IB for hotspot $3,000+)

5. www.hotspot.com  ($7,500+)

6. www.interactivebrokers.com  ($10,000)

Other ECNs are higher.

 

Of these, and of all other ECNs Brokers or their IBs, the best ones are those who will provide a neutral trade platform that acts as a blind bridge between the trader and the counter trader, preventing the counter trader from having control over the trade platform, and keeping the counter trader from seeing what the trader is doing with each of his/her trades. The IBs for ECN Brokers tend to claim this capability/service and the IBs are the ones who would be most motivated to stand by this claim.  The IBs make much more money when the trader, their client, is successful.

 

The bottom line:  If possible, the trader does not want the counter trader to have knowledge or control of three things:

 

1, the trade platform to manipulate the timing of  your trade entries, and especially your trade exits. 

2, the variable spread rate and the interpretation of a fast moving market that determines the justification for variation in spread rate. 

3. the knowledge of where the trader is placing protective stops and take profit limits.

 

Most traders do not yet have access to the higher privileged currenex trading platforms and to institutional trading, but these privileges offer more competitive advantages and blind bridge services than the retail brokers.  This requires much more money in an account, and much more experience as a trader to be worth risking that much money.  Its better to start practicing live trading only after you have proven a successful trade plan in a demo account, and then to begin live trading with a very small amount of money until you have obtained the experience and ability to grow a live account enough to transition to higher account sizes, advantages, and privileges.

 

To do this, you must have the right combination of trading education, proven trading skills, a proven trading plan, and the self-discipline to stick to that plan as it has been refined under demo and live trading.

 

There will never be a perfect broker.  There will always be risks and the necessity of accepting losses.  And, there will certainly always be the trader’s emotions to manage, to control, or to eliminate, through belief system and though pattern rewiring, re-establishment, and reconstruction.  After all the rest, this is, of course, the ultimate challenge that every trader must face and overcome.

 

Stephen Story

Forex Trading Strategist

support@businesscoachpros.com

www.forexcoachingpros.com

1-800-818-1023 Ext 3001

 

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