These brokers are known in the industry as market makers. The problem is, the vast majority of forex brokers actually operate in this manner. When you first start out trading you assume you are buying and selling from other participants in the market: if you make money, someone else is losing money and vice versa. This is true to a point, but often this ‘someone’ is a lot closer than you think … it’s your broker!
The vast majority of new traders lose money, that’s a fact. If they continued to trade and addressed shortcomings in their strategy and psychology, they would likely improve and end up becoming profitable, but many just aren’t up to the challenge and leave as losers. Market makers are not only fully aware of this, their entire business model revolves around it. Market makers make money when their clients lose, simple as that. This is a glaring conflict of interest, rather than the broker making money when the client wins and continues to trade, they actually have a vested interest in their client losing!
The market maker game is to recruit new traders by the hundreds, offer some free, substandard education, or a bonus. Even if the new trader is lucky to begin with and makes money off their bonus, they will likely then make a much larger deposit which they eventually lose.
Because of the inherent conflict interest involved in making a market, some (though not all) market makers have been known to engage in some extremely nefarious tactics. There are horror stories of unexplainable spikes, spread widening, stop hunting and even refused withdrawals and closed accounts!
STP Forex Brokers
STP is short for Straight-through Processing, STP brokers essentially operate on the model you thought your market making broker used: they make their money off the spread and you are actually trading against other participants in the market. STP brokers aggregate prices from their liquidity providers and add a small markup, you place your order with the broker, the broker passes the order on to their liquidity provider (retaining the small difference in spread). Because you are trading against other participants in the market and not your broker, STP brokers have no interest in you losing. In fact, if you lose money and stop trading, then you are no longer earning your broker money.
The STP model is a huge step up from the market maker model and Vantage FX offers this model to all clients on our standard accounts with a minimum first deposit of only $100. Even so, many professional traders and scalpers find the third brokerage model to be cheaper: true ECN.
