Pros:

• The trading platform usually comes with free charting software and news feeds. (For related reading, see Demo Before You Dive In.)
• Some of them have more user-friendly trading platforms.
• Currency price movements can be less volatile compared to currency prices quoted on ECNs, although this can be a disadvantage to scalpers.

Cons:

• Because they may trade against you, market makers can present a clear conflict of interest in order execution.
• They may display worse bid/ask prices than what you could get from another market maker or ECN.
• It is possible for market makers to manipulate currency prices to run their customer's stops or not let customer's trades reach profit objectives. Market makers may also move their currency quotes 10-15 pips away from other market rates.
• A huge amount of slippage can occur when news is released. Market makers quote display and order placing systems may also "freeze" during times of high market volatility.
• Many market makers frown on scalping practices and have a tendency to put scalpers on "manual execution", which means their orders may not get filled at the prices they want.

market maker is a person or a firm who quotes both a buy and a sell price in a financial instrument or commodity, hoping to make a profit on the turn or the bid/offer spread. In foreign exchange trading, where most deals are conducted OTC, and are therefore completely virtual, the market maker sells to and buys from its clients. Hence, the client's loss is the company's profit and vice versa. Most foreign exchange trading firms are market makers and so are many banks, although not in all currency markets.

From a former dealing desk clerk:

I used to work at a Large Australian Investment Bank here in Sydney - I'll give you a hint, the bank recently tried to take over the London Stock exchange. I worked on the FX cash dealing desk in 2003 and 2004 - which most of the guys who know dealing desks well....it is the lowest ranked dealer you can be. But I was only 18 years old at the time, and I was on a cadetship program with the bank, through university.

I was working along side some of the best salesmen and traders in the country. These guys are literally on millions or in some instances tens of millions of dollars a year in bonuses and salaries. Anyways, my dream was always to be on the other side of the phones as a private trader, hence me being one now - cause working at banks is quite stressful and i enjoy a laid back lifestyle, but i also have a massive passion for finance.

Anyways, enough lifestories - Basically we were the interbank market. The bank I worked for is among the top 15 investment banks in the world. So we were the end of the line so to speak, we only dealt with other major banks. (Rule of thumb was to deal with Citigroup as little as possible...lol)

However, believe it or not - We also were a market maker with our clients. In fact most major Investment Banks are. Contrary, to people's beliefs that banks are straight through processing, which they are - but also dealt clients prices and matched them with other clients.

We would take positions against our clients, quite frequently - as our division was not only a broker to our clients, but a trading house too. You don't understand the amount of losing volume that came from clients every day.....millions! Through our dealing desk we had a volume on average of over US60 billion dollars. (sometimes it racked over 100-150 billion) - This was in 2003, 2004 by the way, I would imagine today the volume would be much, much larger. So, the trader's who liase with the executing dealers on the desks everyday would try to scalp off your position - so that they can take a commission, plus a greater spread.

For example - If you were long 100,000 euro's at 1.20. Our bank would take a position for 30,000 short euro's at 1.20 against you. Would wait till the market hit 1.1990 and then scalp 10 pips, with a prescribed stop loss. They would not do this all the time, but they would do this when the traders felt the time was right. Sure enough, the amount of losing trades from clients outweigh the winners, and the bank would be in profit.

We would also play clients positions against each other. Not in a bad way....but it was to offer the clients a better level of service - I'll explain why.

Part of the reason why the bank was so heavily focused on being a market maker - was not only to make profits. But to ensure better service for their clients. The real truth is, that we wanted our clients to do well - but the reality was that most didn't, no matter how much advise or consultancy we gave them. Some of biggest losing clients were actually large corporate accounts.

How we would ensure better service for our clients, was by trying to fill most orders (we couldn't do all of them, cause the volume through from some clients was to the tune of tens of billions - including leverage that is.) - and we could only fill orders sometimes, by playing clients up against each other.  However we didn't guarantee fills.

The dealing desk also provided 24 hour support to clients, including advisory from a trader you dealt with especially. (Most of our trades were executed over the phone by the way, we did have a web based platform - but we wanted to encourage traders to ring us up - so we can give them a better level of service through supporting them with their trading - including giving advice, and market information - so a trader could ring us up anytime and ask us for market depth or major buyers of certain pairs. etc)

We would often favor clients who held their positions - we liked day trading accounts for their volume.

Although we were a large investment bank, we hated scalpers and often tried to deter them from using us. Most retail market makers, I would imagine also -would have a hate towards scalpers, cause they would not be able to feed prices through to the client fast enough (since they are level 2 brokers - and receive the prices from interbanks then must pass them on to the client - making them a middle, middle man so to speak). This is probably why brokers like FXCM. etc place scalpers on manual execution - cause scalpers would take arbitrage opportunities from the real marketplace and play them against the price the broker is giving them.

The best place for scalpers is with ECN's perhaps. People who guarantee straight through processing. The only problem is most ECN's don't have dealing desks.

The myths of brokers, feeding through clients the incorrect market prices in order to trigger stops - is quite preposterous. To be able to do that, would not only put the whole firm in disarray, because regulatory authorities not only from Australia (who are extremely tough), but from all around the world in exchanges we dealt in, would be on your case for fraud, misleading deception, and also theft against the client. ASIC in Australia, who is the main regulatory body, considers it a criminal act of theft, to deceive clients in terms of pricing. And rightly so.

This would damage the bank's name - and i imagine it would be all over the media in a flash. One of the strictest rules in the firm, was to have integrity, especially towards clients.

The foreign exchange market is not regulated to an extent - but if pricing can not be confirmed as being executed at market prices for that time (market prices means that there must be a record of prices from anywhere in the world being at that quote at that time), it cannot be done, legally.

I don't know if brokers elsewhere can toy with that idea - set up phony exchange houses and deal incorrect prices with them for example. But I know we didn't do it. I doubt most large sensible, even the larger retail brokers would do it either.

To the idea of chasing stops - Yes, this did occur, quite often. During news times mostly. We would see where stops were with our clients, we also had a good idea where market depth was, and we would send through volumes of trades to take them out, in order to make money for the bank.

See the bank always came first...profitability for the bank the most important thing overall. Clients would leave eventually, successful or not....but the bank was always there, so it was our main priority.

The idea at the end of the day is that it's every man for themselves in the market. Brokers, traders, hedge funds. etc are all in it for themselves to make a buck and they will do it whatever way they can.

If you are a good trader - and know the ins and outs of the market (not placing in house stop losses. etc), you will not need to worry, cause you can play the game - then you're sweet!

My advice is - pick a respectable and PROFITABLE (profitability in a broker is so important, cause the more clients a broker has, the better level of service they can offer you - and the less chance the broker has of falling to the ground), who has impeccable client service. Aim for the bigger retail brokers (if you're retail)....who have great relationships with interbanks.

When questioning a broker, ask them how many interbanks they deal with. If they have a figure less than 5....than stay well away, cause the flexibility of price they will offer you as a client will be completely crap!

Also, just don't go for brokers just cause they have tighter spreads. etc. Of course you want the best deal at the end of the day...but you also want your orders filled and filled fast and a dealer you can talk to - this is why I'm not really a fan of broker houses without a dealing desk.

For everyone who deals with American brokers go to www.cftc.gov - and then go to 'financial reports for FCM's'. Here you can check out the Capital of all the brokerage houses, try to stick to the retail brokerage houses with the highest amount of capital - cause this ultimately means more clients, a better relationship with more banks in the interbank market, cause they can guarantee volumes, and also a better level of service.

Most importantly....make sure your broker is licensed and registered with regulatory authorities in major financial countries around the world. For example - don't be signing up with brokers who offer you tight spreads and guaranteed fills from Nigeria.

Brokers aren't bad, they aren't there to be against you. But they may not, in terms of co-operation in the market itself, work with you. Most brokers who are large and service respectable numbers of clients will tend to try to help their clients become profitable as much as they can.

But once your order is placed, it's every man for themselves...

I hope I've helped some people who are just starting out create an idea of how the major brokers and institutions work.

Cheers!

Rusty