How do brokers view scalping?

I have often been asked if brokers “love or loathe “scalpers”. In the following article let’s explore some of the reality of engaging in a “scalping “strategy with a broker.

A scalper is someone who makes numerous, quick trades throughout the day to profit from small price changes. Scalpers typically hold their positions for a few seconds to minutes, aiming to “scalp” small profits from each trade. This contrasts with long-term trading strategies, where traders may hold positions for days, weeks, or even years. 

Scalper Advantages

1. Reduced Risk As the scalper only intends to hold a position for a short space of time then exposure to risk can be limited by using very tight stops attached to each trade.
2. 2. No Overnight Holding Costs: Since scalpers close their positions before the end of the trading day, they avoid overnight holding fees. This can significantly reduce costs, especially for firms or traders who would otherwise face high interest or margin-related charges.
3. 3. Potential for Rebates: Many brokers or exchanges offer volume-based rebates. By making a high number of trades, scalpers might earn rebates, improving overall profitability.
4. Exploiting Short-Term Opportunities: Scalpers thrive in markets where quick price movements occur. They can capitalize on sharp price changes after key events such as market opens, earnings reports, or economic news, profiting from short-term inefficiencies or volatility spikes.

When scalping, there are several key areas of caution to be mindful of to ensure smooth and profitable trading:

1. Slippage: Slippage occurs when the execution price of a trade differs from the expected price. This can happen due to market volatility or deliberately through broker manipulation. It’s crucial to use a reliable broker and avoid highly volatile conditions where slippage is more likely, as it can significantly impact profits in a strategy dependent on small price movements.
2. Delays in Reporting: In high-frequency trading, any delay in receiving market data or order confirmations can disrupt a scalping strategy. Ensure that your platform provides real-time data and fast execution to avoid missing out on opportunities or encountering execution delays.
3. Illiquid Markets: Scalping in illiquid markets is risky because the bid-ask spreads tend to be wider, and orders might not be filled at the expected prices. Be cautious when trading assets with low volume, as the market depth might not accurately reflect available liquidity, leading to unfavourable price movements when entering or exiting trades.

Before embarking on a more detailed study of the situation, I think it's worth reflecting on the history of trading. Before the advent of the internet, all orders to the market, whether it was futures or stocks and shares, had to be done via the telephone. That would involve you making a phone call to your broker, the broker would then speak to the floor trader who would execute the trade via the market maker offering the best price for the trade, and then that trade would then be reported back to broker then client. So, in these situations there was quite a great time delay between you asking for an order to buy or sell a particular instrument and it getting executed. This could lead to all manner of events whereby the price you wanted to deal, and the actual trade price executed could vary be a considerable degree. Of course, you could always set a limit for a trade but would have little knowledge as to the likelihood of the trade being executed

Moving forward into the 2000s, the internet had finally arrived, and with it, we got all sorts of high-speed trading platforms which relied on one click to execute trades in a much quicker time than previously experienced. It wasn't all plain sailing, though. I can recollect myself there was a huge financial meltdown in 2008, and at that time, the number of orders coming into the market were enormous as stories of financial companies impending collapse terrified investors and led to huge volatility swings in all equity markets. However, internet connections were not capable of dealing with the mass influx of orders and “latency arbitrage” became a huge problem for all online brokers. This is where you would see a price on the screen, and the actual price in the actual underlying market was significantly different. I can recollect myself at one stage watching a latency arbitrage on one broker’s screen versus the underlying market where there was a 40-second delay, which was incredibly profitable, but the broker involved eventually went out of business as clearly everyone could see the same equally profitable trades

Following the 2008 financial crisis and the advancements in technology, many brokers have greatly improved their systems, reducing the latency and slippage issues that were more prevalent in the earlier years of online trading.  

I think as we move towards 2025 trading it is worth noting that when you trade with a broker in fact there are two quite distinct business models that they employ which many retail clients may not be aware of. The first type of broker is known as a Straight-Through Processing (STP) broker or an agency broker. These brokers simply pass client orders directly to the market or liquidity providers without any interference or involvement. They will receive a commission from you for executing the trade and you will get the exact price that the trade was executed in the main market. Quite often they will also receive a tiny volume-based concession from the market provider they use but there will be no issue about the price that you deal at.

THE same cannot be said for the second type of broker a Market Maker or Dealing Desk broker, which is common with Contracts for Difference (CFD) providers and other retail brokerage platforms. In this setup, when you place an order, it doesn’t necessarily get passed on to the wider market. Instead, the broker internally executes your trade against their own book—they are essentially taking the opposite side of your trade. This means that your trade is being matched within the broker’s internal system, rather than going to an exchange.  In fact, some brokers are more sophisticated as many use the Client A Client B classification system.

• Client A (the winning client): A trader who consistently makes money by making savvy, sharp trades. Brokers view these clients as potentially risky because if they don’t hedge the positions, they could end up losing money when these client’s profit. As a result, brokers tend to hedge Client A’s trades in the external market to minimize risk. This means when Client A places a trade, the broker might simultaneously place a matching trade in the broader market to offset any potential losses.
• Client B (the losing client): A trader with a poor track record, who often makes trades that result in losses. Brokers see these clients as less risky for their own bottom line, believing that Client B will likely continue to lose. In this case, instead of hedging the trade, the broker might simply take the other side of the trade internally, confident that they will profit when Client B loses.

Given the information that brokers hold about clients trading activity allows them to provide services which in fact sound great for the client. These might include smaller stake sizes than the normal size, promotional tight spreads on heavily traded markets and even volume rebates to active clients. These will all be very well advertised on the brokers promotional material but of course they have “done their numbers” and are very aware of the real cost and benefit of encouraging new and existing clients to deal more.

So, with all that background brokers will always welcome scalpers as they know the project is profitable for the broker in either system of execution. However, there is a caveat if the client is trading in a market that is not easy to hedge and is successful, they will do everything to stop a winning client on the market making model. A few years ago, I had a very successful scalping system on the Dax (German Index). The background was that quite a few brokers tried to make 24-hour prices on the Dax despite the underlying market shutting at 9pm (UK) and not reopening until 7am. The essence was that the brokers were hopeless at calculating this index properly and I would go on a few minutes before the market reopened and take full advantage. Unfortunately, the Dax now opens at 1.15am and much of the edge is gone. One broker who had “loved me” for quite a long time which even included getting taken out for expensive meals at the finest eateries- two weeks after I really started pushing my trade size on my Dax strategy closed all my accounts!

In conclusion experience has shown that without active traders’ brokers will clearly struggle to make a return on what can be quite sophisticated and expensive retail platforms. Scalpers require very fast prices, tight dealing spreads and very little slippage in their trade execution to be successful. Brokers will always encourage active clients, and it is always worth asking for any additional trading incentives but do be mindful that restrictions are likely to be placed on your trades if the broker cannot hedge your activities!