fundamental questions on MM/ECN business practices

Hello community,

after spending years of focusing only on the strategy part of this business I finally came to realize that there is another part of the profitability problem I should have addressed with equal emphasis. Since so many contributions in this forum seem to reflect personal (and quite often contradictory) opinions when it comes to certain aspects of the broker debate it is very hard for me to draw useful conclusions in order to finalize my carefully developed business plan. So below you will find some fundamental questions that might seem redundant at first glance but I thought them necessary to get some clarity on said aspects. I admit there are other questions that are just based on lack of knowledge / experience and maybe even common sense

1) Market makers are rumored to trade against their clients. *cough* Always? Or only if there are no / not enough other clients to fill the other side of your order.

2) Does it depend on the broker and the client (and his profitability) which of the two above mentioned options will come into practice?

My business plan involves meeting up with the broker of my choice and negotiate some "special" customer conditions. Something along these lines:

"Yo broker. I know that you are a crook. No offense. I'd probably do the same. Anyway, I've heard you trade against your clients, no need to deny it. I would do the same. But you see I got this killer strategy that would make me a made men if you'd but stay out of my way. In fact, that said strategy is so sicko that if you dared to trade against me, you'd lose in the long run unless you pull some nasty tricks like requotes and slippage and terminal freeze and bolts of lightning ya. But you wouldn't do that right? Coz you're an honest broker I've heard *cough* So instead of trading against me why not only match my orders against those poor losers? And if there is no loserz around to match my orders with than I'm happy if you don't execute. You hear? Do not execute! You can have my spreads in return and I trade quite frequently which means lots of spread for your bread. Yeah baby, this is what you call a win-win situation! I mean the trading frequency might kill my profitability but that's not your concern anyway so... Do we have a deal?"

3) Is there nobody out there who is worried that some broker employee (not the broker himself but one of his poor paycheck employees) might see that you're profitable, look up your trading record, find out your strategy (because it is very simple), tell his friend, his friend tells his mama and before you know it the thing gets viral and the whole FX system would stop working because it becomes public? Brokers might be shady but employees might be crazy.

4) How does an ECN (yeah they don't exist, yeah my account is not big enough for that) I repeat how does an ECN lose money? His gains consist of commission and spreads only *cough* but how does he make losses? Are there only costs for employees, electricity, banking licenses, regulation licenses, etc. but no inherent business risks other than losing clients / not having enough clients?

5) How can a broker withhold withdrawal without fearing legal prosecution? I mean it's not his money, it's the customer's money. And if your money is your money then preventing you from withdrawing it would equal theft. Wouldn't that make him a subject to legal prosecution?

6) Why would a broker withhold withdrawal? What does he do with it? Is it because the money you are trying to withdraw consist of his losses? That's what you get for trading against me, Mr. Broker!

7) Can regulated brokers have unregulated liquidity providers? Is there a place where all the liquidity providers of a broker are listed? The idea is to check whether a MM has outsourced his dealing desk activity to his liquidity provider by checking... the MM's liquidity provider.

Thanks for your benevolent replies.

Hello, Yojimbo. I don't actually have enough real information to answer these questions. But let me give you my opinion on some of them.


I guess they only trade against you, if they don't have another client to fill the other side of your order. If they have client A selling x lots of XYZ financial product and client B buying x lots of XYZ financial product, they can simply match client A and B orders with one another. That way they get the spread and commission "without any risk". If on the contrary, there is no client B to match client A's order with, they will have to take the other side of the order, effectively trading against you (they may hedge the order or a part too).


I think so. The broker has or should have a risk management system working. If they see someone who is very profitable, they may start edging their orders, because the order's probability of winning might be higher. On the contrary, if they see someone losing money, they may just trade against them an get the money the lose plus commission and spread.


I don't think it is so easy to backtrack or find out an strategy from their position. There are many factors involved, that can be very difficult to find out. Lets take for example an easy moving average crossover strategy with the Kelly ratio as risk management system. There are so many combinations of moving averages types an lookback periods, that it is very difficult, even with a decent computer, to backtrack or to find out the actual parameters of your strategy. It is definitely possible to get an idea of what trading system someone might be using (trend following, mean reversion, arbitrage...), but to get the right parameters is something different. And without the actual parameters it is difficult to find out the actual strategy used.
On the other hand, I also think that brokers might get away with cheating and doing bad, but not employees. Brokers are companies with more money and suitor's protection than a simple person who might even be getting paid so bad.

That's a good question. But to give an answer, I would need to have precise information or examples of ECN brokers reporting losses.

Normally, these brokers are located and registered in fiscal heavens. Places like Nevis or the Cook Islands require you to sue the companies registered there in Nevis or the Cook Islands and to pay for the court proceedings. For most traders the monetary and time costs of suing them is too high compared to the loss the would have by not being able to withdraw their money from their trading accounts.

I don't really know. Maybe that is also part of their business model/plan.

I hope someone can answer these questions. In this case, I can/have nothing to say.

As I said before, I hope my answer are useful. I would also like to hear what other people think and know, because I agree with you: your/my profitability depends a lot on the broker we are trading with.