Market makers can hedge profitable trades of their clients on the interbank market. But they usually don't do it as they are greedy and want to profit from their clients as much as possible (even to the detriment of clients).
The result from these situations and these attitudes of market maker brokers is clear. Even if you would be the best trader in the world, you would never be profitable (beating your broker) over the long term.
Quite simply such a broker would not allow you to be profitable. They would probably do spread widening (huge numbers), re-quotes, hunt your Stop-Losses, artificially increase slippage, etc. until you begin to lose.
It's like if you were trying to break through a strong wall with your head.
Unfortunately, the largest number of traders (some 90%) lose all by themselves anyway, even if no one is working against them. Brokers know this and they try to take advantage of this statistical fact by pocketing the money the traders lose.
So they began thinking how they could make higher profits too.
Finally, they explored an elegant solution.
For better understanding, first, let's review how ECN and STP brokers work. These type of brokers, unlike the market maker brokers, always redirect your orders (transactions) into the market.
So they do not leave your orders against their own books (orders), and they never act like a counterparty to all your trades as a classic market maker would. That's the gold truth and it is the way how completely all of today's STP/ECN brokers work.
Let's dip deeper on this to see where is the problem.
Redirecting the trade orders to liquidity providers is not the questionable fact with ECN/STP brokers. However, it does not tell us anything about where exactly all orders are being sent and who are the liquidity providers.
It may shock you to learn that the vast majority of all ECN/STP brokers (around 90%) send your orders to their contracted market makers (or to only one market maker) which act as liquidity providers and with which they share the profits from the losing positions of their clients.
Due to the fact that the end market maker (where your transactions actually take place) acts as your counterparty (uses the B book business model) his profits are considerably higher than the actual gains of your broker which uses the A book business model.
What does this mean exactly?
Now, you probably understand why it is so difficult for the overwhelming majority of traders to be profitable in the long term.
The efforts of these wannabe ECN/STP brokers are probably clear by now. In order to generate maximum profits for them, they want you to lose money. And, we're back where we started, again at the issue of conflict of interest with your broker that trades against you.
Here, although, the broker does not directly trade against you, the principle is still exactly the same. Passing the trade to another party that trades against you is just a way to hide their business model.
Given this, if we take the number of market maker brokers and ECN/STP brokers, we find that 98% of the total number of brokers trade directly or indirectly against you!
That is not a good position to be in as a trader.
So what might the solution look like?
Remember, you should always try to avoid a broker that trades against you because ultimately you can never be profitable over the long-term in a conflict of interest situation.
Therefore there remains only one solution - to find a broker that sends all your orders and transactions to the true interbank market.
But how to find such a broker?
It certainly seems like looking for a needle in a haystack.
Based on this problem, we created the Real Brokers Reviews page at the FX Trading Revolution website.
We tested hundreds of brokers on real accounts and have done thousands and thousands of comparative tests. What is the result you might wonder?
The difference between brokers is huge and has a direct impact on the profitability of our trading. It is striking how the absolutely identical trade is profitable at one broker, but ends up in a loss with the second broker.
Different spreads and trading conditions affect whether a certain trade will be profitable or not, however, some of the dirty practices that Forex brokers are usually involved in, also played a major part in turning the trades to losers.
At the end, we can conclude that when choosing a broker things are not always what they seem and we should always be extra careful and meticulous during this process.
For more information on our tests and results visit also our Truth About Forex Brokers page.
Related education and FX know-how:
Trusted FX Brokers
Haven't found what you're looking for? Contact us!
Forex Education - Basics:
Free Forex eBooks:
Forex Education - FX Brokers:
Forex Education - Technical Analysis:
Forex Education - Money Management:
Forex Education - Psychology:
Forex Education - Others:
Forex Interbank Trading: