“……they just want everyone to lose money and the winners to leave…” says industry insider.

The previous video showed just some of the order execution delays and how they were calculated. This next video below further elaborates on the delays and shows a specific example where the same strategy that was traded on a different (smaller) account with the same currency pair and same broker was executed without any problems.

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What is a Bucket Shop?

A bucket shop is a illegitimate broker masquerading as a legit market participant that rarely if ever sends out to a real market. Instead, they hold their trades internally (in a ‘bucket’) hoping that their client will lose. Being regulated in a respected and developed jurisdiction does not automatically exempt a broker from the title of bucket shop if it can be proven that the broker does any two or more of the following consistently:

1. Trades against their clients best interests (e.g. asymmetric slippage, confusing dealing prices, unreasonable last look times, ignores/re-quotes/cancels deals without a specific reason),
2. Hardly matches or intends to send/offset the majority of their unmatched volume to a real market (wholesaler / ECN / exchange / etc.),
3. Profits directly from client losses,
4. Cannot fully process withdrawal requests within one business day.

It is important to make a distinction between legit market making and bucket shop. A true market maker would have clear rules of engagement in which they are prepared to make a deal at offered prices. There was a friend who worked for an MM broker that actually had spreads with commissions that were lower than most prime of primes that I’ve seen, and the execution time was about 100ms or less.

However, it had a clear stipulation: the majority of trades had to be held for at least 2 minutes or have 4 pips profit. So those people who need to close most of their orders in < 2 minutes would then pick a different broker in which to proceed. Interestingly he also observed that most traders did actually lose money on their own, no need to delay orders or other nonsense behavior to trip them up. However, the hardest part was actually finding new clients….because you can only churn so many clients before you run out of people to churn…

Emphasis on Transparency 

A legit market maker would also have some way to hedge internalized or undesirable flow they could not match. They would more than likely be connected with one or more exchanges, ECNs or liquidity pools because that’s what they actually do…..help provide liquidity to other clients.

Many times these deals are done anonymously (the origin of the buyer/seller is not fully revealed either via novation or hidden until after the ticket is complete) to keep the deals honest. But there would be a record of these transactions that all parties involved can have access to….promoting transparency.

The ‘correct’ way to make a market includes emulating real market price feed (from prime broker or PoP) and provide instant or near instant fills at prices/size that you quote (clear rules of engagement). You hedge to a larger wholesale market, raise spreads, etc. as necessary to control risk.

In practice, a market maker spreads + execution speed should emulate that of what would happen on an exchange or ECN….in some cases being even better (faster and/or with larger size) or tighter spreads. Remember that you are competing with other (legit) market makers and liquidity providers, so the law of supply and demand would keep spreads + commissions competitive. More on this in another article.

But I suppose what the client doesn’t know, won’t hurt him, right? I’ll end with a quote from the latest ESMA Q&A that provides guidance on what EU regulators should focus on to improve markets:

“For example, a firm offering CFDs or other speculative products acting as the counterparty to a retail client’s trade without any hedging arrangements in place has no incentive to execute orders in the best interest of the client, because if the client “wins”, the firm “loses.” Such a conflict of interest in all likelihood cannot be managed and should therefore be avoided, by not adopting such a business model….” 

This article was written by Jon Grah, a Trading Signals Automation Specialist at AwarenessForex.com. Mr. Grah develops and trades intraday automated trading systems for hedge funds, prop firms, select private clients that boldly demand high alpha. He has over 16 years of combined trading experience in the financial markets, including designing one of the first zero-lag price measurement tools: APAMI.