How can I find out if a broker is a Market Maker or a Bucket Shop?

[AnnaTrader]

Hi fellow traders & investors,

Wondering if there is an easy way to determine whether a brokerage firm is a market marker or bucket shop?

As I understand it, a broker that is also a "Market Maker" may, instead of placing your order on the open market, place it within an in-house market where the players consist of the broker itself and the brokers clients, and that in this in-house market the broker can manipulate bid/sell prices to its advantage and potentially to your disadvantage - this all being fully legal!

I further understand that bucket shops are an illegal practice where the broker may not even place your order on the market, and even if they do, they may decide not to report or distribute your gains to you, and instead keep any gains for themselves, but happily pass on the losses.

I am researching potential brokers and find this information difficult to determine. Perhaps I am not looking in the right places. It would make sense that if a broker did engage in any of these activities it would more likely be discoverable via online forums like this one rather than their websites.

It'd be good to hear any advice on this if anyone can help.

Thanks,
Anna

 

[banco]

Which instrument? If it's forex most of them are bucket shops. Oanda and interactive brokers are meant to be on the up and up with regards to forex.

 

[AnnaTrader]

Which instrument? If it's forex most of them are bucket shops. Oanda and interactive brokers are meant to be on the up and up with regards to forex.

Thanks for responding banco....

I actually am so new to trading that I haven't decided whether I want to trade Stocks or FX, so both I guess.
Some of the brokers I have been looking at allow trading of both stocks and FX.

For some brokers, I have discovered that the Financial Services Guide outlines whether they are a Market Maker, and that generally, the cheaper the brokerage fees/commissions, the more likely they are to be a market maker.

As for whether they are also bucket shops, the only info I have come across is on forums like this one and the prevailing view seems to be that the bigger brokerage firms are less likely to be bucket shops, but smaller ones are only able to stay afloat by being bucket shops - illegally of course.

When you say Oanda and Interactive Brokers are on the up and up with regards to FX - are you saying they are the popular choice for most FX traders? Or that they are growing due to bucket shop practices? - Sorry if this sounds like a stupid question.

Thanks, Anna

 

[Trembling Hand]

Are you based in Australia?

 

[AnnaTrader]

Are you based in Australia?

Yes I'm in Australia.

 

[Trembling Hand]

Yes I'm in Australia.

Well go with an Aussie based broker for ASX stocks and make sure the account set up process involves CHESS Settlement. That way you will know that you are trading market listed instruments.

http://www.asx.com.au/documents/research/chess_brochure.pdf

I would also stick to a Aussie base FX provider too so you are governed by Australian law and account protections. How adequate they are is up for debate but if anything goes wrong I would prefer to be dealing with a home based company rather than one in Russia. As for MM or direct access I wouldn't worry about it. There is very little difference between the two. Especially as you are starting out and hopefully just using small amounts.

 

[AnnaTrader]

Well go with an Aussie based broker for ASX stocks and make sure the account set up process involves CHESS Settlement. That way you will know that you are trading market listed instruments.

http://www.asx.com.au/documents/research/chess_brochure.pdf

I would also stick to a Aussie base FX provider too so you are governed by Australian law and account protections. How adequate they are is up for debate but if anything goes wrong I would prefer to be dealing with a home based company rather than one in Russia. As for MM or direct access I wouldn't worry about it. There is very little difference between the two. Especially as you are starting out and hopefully just using small amounts.

Trembling Hand, thank you for the great advice! It makes sense to go with an Aussie based firm. I didn't even think to look at that. And yes I am starting out very small. I've been trying to cross all my t's and dot my i's early on in the picture with respect to choosing the right broker etc, but I am sure as I go along I'll get a better idea about different broker firms and can potentially change down the track if need be.

Thanks again for your help!

Anna

 

[Smurf1976]

Given that the OP is just starting out, I'd pick a mainstream Australian broker and go from there. Commsec, Etrade etc (not saying they're the best brokers around, just that they're examples of large, reasonably well known mainstream brokers which will be sufficient at least initially and aren't "dodgy" in any way so far as I'm aware).

As for forex, personally I'd stick to shares for the moment. No need to complicate things when just starting out. Keep it simple, get it all worked out, only then start thinking about adding complexity. Just my opinion.

 

[Trembling Hand]

As for forex, personally I'd stick to shares for the moment. No need to complicate things when just starting out. Keep it simple, get it all worked out, only then start thinking about adding complexity. Just my opinion.

Why would you say that stocks with the thousands of different options is simpler that FX with only a handful of pairs that have tight spreads and therefore worth trading on a cost basis?