What are some of the illegal things that market maker's can/can't do. Or some things they used to do but are now illegal?
I know you are (half) joking, but I want to be clear that illegal front running involves KNOWING of an order which specialists, brokers, and MM often have access to. HFTs simply make educated guesses. There are advantages that HFTs have, but they come from the same old being in the exclusive club. Nothing changed.
Trading inside information is illegal Market Makers trade their own account right? What are they really obligated to do? Are we talking about Obligations vs. Privileges arranged by the exchange?
Not sure about MM on the equity market but in Forex: They freeze your platform so you can't get out of a losing position. They don't respect your SL on those platform freezing. They make the platform unstable on critical market conditions to play with your nerves and drive you to mistakes. They make their platform unstable so you can't scalp They grossly widen spreads to a point where profit is almost impossible. They keep their "PROPRIETARY" price feed always a few pips from profit so you can't scalp. After 12 years in this business I saw all that in a regular basis and much more. The only way to beat a MM is to trade swing or long term. But even in those conditions they will close your positions without your permission way before your profit target. There are so much more tricks they play like you click to go long and a short position appears etc If all that does not tame you and you still manage to make money they will just close your account. That was my experience. Since I started trading futures a few years ago all these problems "magically" disappeared. Now with the CME opening the micros to MM I guess the forex problems will start to pop up on equities.
I am very skeptical about the honesty of retail brokers. I used to day trade for profit all the time, but it has become impossible in the last five years. Here are things I have seen: Crazy outside fills on buy or sell orders - even on limit orders. On Schwab I started using market on options because 80% of the time I would get price improvement over the bid/ask- BUT, 20% of the time they would fill me at far below even all the quotes I had seen go by during the time my trade was open. Sometimes my trade would open at -$750 for example. I have seen stocks that have not had a down-tick in two hours suddenly reverse and lose a TON of gains the the second I bought in. Even in stocks that report 2-million shares in volume that day. There is no logical reason for this, except "bid-shilling" where they are trolling for a buyer who takes the bait and then they immediately start shrinking the value of your position. And most of the time cannot wait them out, the longer you hold on the more you bleed, and then then the second you get out, it turns around. Definitely not filling immediately, and while your order is open the stock moves up 2 points and then you see your fill come in at the price after the move (so you get no gains). To sum up, I have seen all of these things, and often several times a day. I truly do believe there is illegal action going on at brokerage houses these days, and I would like to see it blown wide open. What have you seen?
I don't think there is anything illegal going on at brokerages ... they are under very strict compliance. It's quite simple imho - technology had evolved but unlike MMs/HFTs, brokers do not have skin in the game. There is absolutely no incentive, nor rules that I know of, which require a broker to keep up with technology even when dealing with best execution. It's my opinion, that there is actually a dis-insentive in doing so for most retail brokers.
Strict compliance to do what, though? They can still front-run, dark pool and run test trades for price discovery. Why would I ever get a fill that is way out of the range of anything I saw in my level 2 quotes during the time my trade was open? Being "legal" is not the same as being honest.