7 Ways to Spot a Cheating Broker

The world of brokerage firms is nothing less than a “dog eat dog” world, full of scams and supposed truthers who turn out to be nothing more than great showmen with a modus operandi that goes beyond being the conduit between a trader and the interbank network.

To many, the idea of a broker being a crook doesn’t even exist in their minds because of their naivety or blatant trust in the “system” that makes it possible for trillions of dollars to flow through the trade network each and every day. How could a global system be so rigged? Surely there are regulations and strict rules that all brokers must follow and its not easy to scam a trader just like that…right? WRONG.

In this post, I will share with you 7 ways you can spot if your broker is cheating you.

1. Your Broker Operates a Dealing Desk

If your broker runs a dealing desk then there’s no question about the fact that he will be sitting opposite to you in every trade you take. If you win, money comes out of his pocket. If you lose, it goes into his pocket. So think…with the tools and resources available to the broker whereby a trader is trading on his network, using his platform, using his price feed and instruments… do you really think a broker with a dealing desk will let you win?

2. Your Broker Is a Market Maker

It is a common misconception that a broker that is a market maker is not always dealing against you. This is not true. How does a broker make the market for you? By sitting on the other side of the trade. It is easier to explain this in the context of equities/stocks instead of forex. Say you want to buy 100 shares of APPLE. Before the broker can execute your transaction, there needs to be someone on the other side willing to sell 100 shares of APPLE so you can buy it. Now in the case of APPLE, filling an order for 100 shares is not difficult at all because of the sheer volume that stock trades every day. A genuine market maker maintains an order book whereby all BUY and SELL orders are being matched against each other and in the instance a corresponding order is not available, the (regulated) market maker is required to be the counter-party for your trade.

Now in the context of forex, with $5.3 trillion of trade going on each day, no one except the top end liquidity providers need to make a market for you and I. Your broker, just like every other broker is buying liquidity from the same guys either directly or through intermediaries (also called Primes or Prime of Primes). If your broker feels compelled to make the market for your forex, CFD or Spot Metal trades then you have to ask the question – why. If you place a mammoth trade of say 200 lots in one ticket then yeah sure… many smaller brokers will not have the liquidity connection to match that trade.

Good brokers will split your order and pass it to multiple liquidity providers at the same time with the aim of filling your trade or simply not take the trade in the first place. So if your broker is a market maker…then you better run mojito!

3. Your Broker Offers Huge Sign up Bonuses

If your broker is offering wild signup bonuses such as 50%, 100% or 200% then you should have alarm bells going off instantly. Think about it. What is this bonus all about? Is it real money? No. Can you withdraw that from your account as cash? Hell no. So what’s it for? Its to encourage you to place a large deposit in your account and supposedly give you a bigger account to trade with. However, you will notice that such bonus offers are usually made by brokers that run a dealing desk or are market makers. They know they will win in the end. They will let you win trades for a week or two and then their algos will take over the spread betting on their side making it virtually impossible for you to win a trade. Net result? Your money + the money they gave you goes back to them anyway…

4. Your Broker Offers Super High Leverage

Leverage in the world of trading is like drugs (not prescription…the other kind). Most professional traders that make a killing every day are on leverage below 100:1. I know many traders personally that trade with leverage as low as 35:1 or even 0. Why? Do they know something you don’t? Yes. They most definitely do. Leverage is intoxicating and turns a trader into a gambler. If your broker is offering you high leverage, then run for the hills. This is how it would work in favour of the broker.

You deposit a small amount, say $100. They give you 1000:1 leverage, which means that your $100 is actually worth $100,000 in terms of a trade reserve. The broker will then bedazzle you with forex courses and expert advisors that show fantastic results for 1lot trades. 1 Lot = 100,000 units of an instrument. So you get excited (or intoxicated) and place a 1 lot trade on your $100 account. You win. Yay! 10 pip profit = $100 and within seconds you have doubled your account. Let’s bring out that credit card and make another deposit – because its so easy and best of all, your angelic broker does not charge you any fees on credit card deposits. This time, $500. You do the same but now, the dealing desk has kicked in and you’ve lost the $500 in 5 minutes…With leverage, you lose your money much faster than any other way.

5. Your Broker Offers trading partner solutions

you sign up with a broker and a day later a charming, seemingly experienced trader calls you to give you the good news. John, the seemingly experienced trader can help you convert your $100 deposit into $1000 in a week. All you have to do is give him control of your account so he can make trade executions on your behalf. But John only offers this great service for traders who deposit a minimum $5000 or so because John, being the expert that he is, only likes to work with serious traders. Smell it yet? Do I need to say anything more?

6. Your Broker Offers Low Deposit Accounts

You can open a forex trading account these days with just $10. Really? Who would do that? What could you possibly achieve with a trade account with $10? Only one thing. Lose that $10 to your broker. Running a brokerage carries fixed costs and unless you have a way of making it back ten times over, no broker with the business acumen of a high-schooler will make such offers. For each trader a brokerage signs up, there are fixed costs that cannot be met unless a trader achieves a certain volume of trades. for instance, Manhattan Global Markets cannot support any traders with a trade balance below $500 because with the leverage we offer, the trader will not be able to make enough trades for us to make enough revenue from the spread and keep our doors open.

Of course, none of this holds true if your broker is a dealing desk type broker in which case, he doesn’t give two hoots about meeting costs per trader etc…because him being the liquidity provider himself, he ain’t paying no one nothing for executing your trade. He is just going to deal against you and being the “house”…he won’t let you win consistently and over a period of time, his account will be in the black and yours in the red. Savvy?

7. Your Broker Is uncomfortable with Latency Arbitrage or high-speed scalping strategies

Latency arbitrage is a rock0-star of a way to make money in the markets. Its fast, and not many people know about it. However, your broker does and he does NOT want you to use latency arbitrage techniques on their network. Ask…why? Because you make money and they won’t like that – not if they are a dealing desk type broker. So ask them openly… if they um and aaa then you know.

Tips for finding a good broker

Finding a broker is easy. Finding a broker that will be your trading partner and serve your best interests is a needle in a haystack situation. Here are some tips that might help you finding a good trading partner of a broker.

  1. Keep the 7 signs of a cheating broker in mind when going out on a hunt to find a broker.
  2. Ask your broker these uncomfortable questions
  3. Run as far away as you can from brokers that offer high leverage or massive sign up bonuses
  4. Google the brokerage and see if there are any scams listed against that broker
  5. Check the jurisdiction the broker is registered in. Frankly, Cyprus, Belize, Bahamas, Marshall Islands and Seychelles don’t have the best reputation in the world in general… so tread with caution.
  6. See if you can locate the senior management of the brokerage and speak to someone senior to gain comfort (ask them the same uncomfortable questions as in point 3).
  7. Ask them directly if they will allow you to trade using your own EAs that use high frequency trading methods.
  8. Check up on forums and see if there’s anything good or bad about the broker you’re thinking of signing up with.
  9. Pick up the phone and talk to someone.
  10. “Control+F” their client services agreement and find what it says about “Market Making” or “Market Conditions” – many ECN type brokers hide their market making aspirations in the fine print. I used to have one such broker that I recently discovered was market making all this time whilst pretending to be an ECN/STP broker – I was devastated.
I've been involved in Commodities Trading for over 12 years now. I have worked at various banks in the UK as well as in France during my career trading commodities at the desk as well as working with large fund managers at an analyst level.

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