Why do some sites ban Scalping?

When it comes to trading Scalping can mean a number of different things. According to Wikipedia there are three different definitions of what scalping involves and in this article we are going to be primarily concentrated on the third featured definition: 

‘a legitimate method of trading based on quick momentum trades'(From Wikipedia) 

A number of traders look for an opportunity where they can open a position and take a very minimal profit from that position before closing it. These traders are often using pieces of technical analysis to help to determine when such a move or opportunity will occur. Scalpers may only keep a position open for a short period of time up to a couple minutes max, a number of scalpers automate such trading (with Expert Advisors for example). 

A number of providers (including a number of MiFID regulated brokers) do not allow scalping. The definition of what exactly scalping is also varies between these brokers. The fact that some brokers put a ban on scalping annoys a large number of clients particularly when such a fact isn’t made explicitly clear. It is also appears that such a move is bewildering as it drives away custom from many people and leaves others to shut up their accounts and move elsewhere.  

To me it appears that there are two main reasons why such sites would ban scalping. 

  1. The information and price feed on the trading platform is delayed. Enough that someone who was watching the live market would be able to exploit this delay and make a considerable profit.  
  2. The other reason why some brokers do not accept scalping is that they are operating as on a bucket shop model of business. 

On the second point, there are two reasons why a bucket shop will find scalping very problematic. Firstly bucket shops will only often hedge large positions in the open markets meaning that they lose out significantly when traders continually scalp for profit. As they have no opportunity to undertake any kind of risk management. Secondly, scalpers also pose a problem for the liquidity of bucket shop making such traders highly undesirable. 

If the reason why they operate a no scalping policy is down to the fact they are operating a bucket shop then this a definite reason not to work with such a website. If it is due to the first reason then this suggests that there is a serious problem with the companies platform and this might be reason to look elsewhere. However traders who choose to take a more long term position may be able to deal with the fact that the platform’s feed is slightly delayed. Though it is  a discomforting thought to think that your broker price feed is so delayed. 

As a general rule a banning of scalping is generally a bad sign.


Leave a Reply

Your email address will not be published. Required fields are marked *