The Dirty Secrets Brokers Don’t Want You To Know

‘FREE COMMISSION’ the banner declares in big letters across the homepage. ‘OUR BIGGEST SIGN UP BONUS EVER’ another reads. Brokers definitely know how to grab our attention. But, are these deals as good as they seem? Should we be delving a little deeper? The answer is undoubtedly, yes.

When it comes to trading brokers, generally, you need to probe a little to get to the truth. It may seem arduous but it will pay off in the long run. If a deal seems too good to be true, there is every chance that it is. Trust your instincts.

An ever-changing landscape, frequently populated by new deals and promotions makes it tricky to cover all bases in just one feature, but below we have rounded up some of the key things to watch out for…

Bonuses

Free money I hear you say? Where do I sign up…

We want it to be true as much as you do. Really, we do. But unfortunately, when it comes to trading, there is no such thing as free anything. At some point, the broker will need to make back whatever they have offered you (ideally with a bit extra on top).

Bonuses are designed to dazzle and lure you in. But it is usually a short-term hit. They often come at the expense of high fees or limitations down the line. This is where terms and conditions are your best friend. Ensure the ‘free’ money is really worth accepting.

Regulation, Regulation, Regulation

It may not be cool, sexy or badass, but regulation is arguably THE most important thing to consider. Before glitzy promos, advanced features or even a slick mobile app that lets you chat to your mate whilst trading. Regulation often equals security. It can do more for a trader than any tool, feature or platform.

Unregulated brokers are essentially the Voldemorts, Green Goblins or Darth Vaders of this world. i.e. they’re often the bad guys. They tend to offer very little protection to individual traders and some masquerade as legitimate while operating sophisticated online scams. Put simply, it’s best to avoid them.

Terms & Conditions Exist For A Reason

We’ve all done it – breezed through the terms and conditions without giving them a moment’s thought. And when it comes to redeeming your free cup of coffee offer, you’ve probably not got too much to lose. But, when it comes to trading, read them. Read them twice if you need to and discuss them with an experienced trader when you’ve finished.

From overnight fees to margin use, slippage, technical support and automated signals… the list goes on. They are all things that could have a seismic impact on your profits and all too often we see key information tucked away into terms and conditions that can be easily missed.

Now it’s worth pointing out, that for the most part, brokers are not trying to pull the wool over your eyes. They are doing what any business or corporation would do, protecting themselves. But you should too, so read them.

Commission-Free trading

‘Commission-free’ means that a broker doesn’t charge you a fixed fee to buy or sell assets. And fewer fees means that you have more money to invest, right? Well, not necessarily.

A broker is always looking to turn a profit. So, whether they charge a commission, management fees, or hefty overnight fees – somewhere down the line, the cost is passed onto the trader.

Now, strategies for profit generation will vary between brokers. For example, Robinhood adopts a commission-free structure. But in place of commission fees, they make their profit on payment for order flow, premium membership fees, interest on uninvested cash and other smaller revenue streams.

In fact, Robinhood has built quite a trendy reputation around its free investment opportunities. When it started offering no-fee stock trading back in 2019, it changed the retail trading game. But don’t be fooled into thinking its social convictions outweigh its ambitions to make money. This came to light in earnest in January 2022 during the skyrocketing of GameStop shares.

Robinhood became the centre of controversy after it froze trades in GameStop shares, depriving retail investors of returns whilst larger institutions continued to trade as they pleased. Unsurprisingly, many loyal customers lost money.

Representatives from Robinhood have since cited market volatility as the reason for the move, which might even be true, but what was abundantly clear, is that its profits came before traders.

So, what are we saying? Well, we’re not saying that commission-free trading should be dismissed. Instead, just make sure you read between the lines when it comes to ‘free’ trading.

Is Trading Just A Game?

The term ‘gamification’ refers to the process of characterising investment or trading as a game. Complete with cartoon mascots, digital confetti and an entertainment ecosystem – these games often allow newcomers to get started with limited capital and little knowledge of ‘how to play the game’ – or rather, how to win the game.

We are essentially seeing a fusion between the world of video games and online trading which is proving particularly popular amongst younger audiences. But ironically, the emphasis on entertainment over education is falling short of anything close to fun in the long run.

Studies have shown that these games are trivialising the serious risks involved in trading. Those playing have been shown to display gambling-like behaviours, with irrational and impulsive decision-making.

Oversimplifying the process involved has ultimately led to users underestimating the pitfalls of trading, often with devastating repercussions. And what makes it worse is that frequent trading, which is encouraged by the nature of these games, usually only leads to greater returns for the broker.

Whose Side Is The Broker Really On?

The simple truth is that some brokers pocket directly from your losses. Quite literally – the more you lose the more they gain. There are, of course, various brokerage models, which provide brands with different streams of income, but let’s take a look at the popular market maker model. It is a perfect example of how the system can be manipulated against you if you’re not careful.

Contracts for Difference (CFDs) are widely traded over-the-counter instruments which means they never reach an exchange. A CFD is essentially a closed transaction between you and your broker. It works like this…

Let’s say you sell a lot of EUR/USD. Someone somewhere will need to buy that EUR/USD lot because there has to be a buyer and seller for a trade to take place.

In the market maker model, your broker can be the one to take the other side of the trade. This means if you lose money on the trade… they win it. The knock-on effect is that some brokers adapt their sales and marketing strategies to encourage active trading and other behaviours that make it more likely that retail investors lose money.

Another example of this is binary options where some unregulated brokers have profited heavily from unethical behaviour and rigged trading platforms. Binary options also lend themselves to gamification, as the trader simply “bets” on whether an asset’s price will go up or down – which is not too dissimilar to betting on black or red at the roulette wheel. The simplicity of binary options make them very attractive to traders that don’t really want to learn anything and naively hope to make easy profits.

This is a simplified explanation and there are more factors at play in the real world but it gives you an idea of the balance of power between an investor and broker. And whilst the whole model might sound fishy, there are actually some advantages to trading with a good market maker. But, issues quickly arise if the market maker is unethical. This is why finding a reputable broker (see point 2), matters a lot.

Closing Thoughts

We hope we haven’t put you off trading completely. Instead, we want you to be safe out there so you can enjoy a long and successful trading career. Brokers are making sure they are protected, and you should too.

So in summary, trust your instincts, sign up with a regulated brand, free money only exists on the monopoly board and always read the fine print.

See our list of trusted online brokers below to start trading today.