Understanding financial brokers and their role in trading

What is a broker and what does a broker do?

In financial markets, a broker enables traders and investors to buy and sell financial instruments by providing market access and handling their orders. The instruments available can include shares, currencies, bonds and derivatives, depending on the broker and the services it offers.

Although the term can refer to an individual professional, in modern retail trading it commonly refers to the brokerage firm that provides access to financial markets. Traders and investors typically interact with that firm through an online trading account and trading platform rather than placing orders through an individual broker.

Why traders and investors use brokers

Brokers give traders and investors access to the services and technology needed to transact in financial markets. Through a brokerage account and trading platform, clients can place and manage orders in the markets and products available through their broker.

The services offered can vary between brokers. Some mainly provide access to financial markets, trading platforms and order execution, while others may also offer research, educational resources, investment recommendations and additional services.

Broker vs trader: Key differences

A broker facilitates access to financial markets and handles clients' orders, while a trader decides what to trade and when, with the aim of benefiting from market price movements. The trader makes the trading decision and assumes the associated market risk, while the broker provides the services and infrastructure through which orders are placed and positions can be managed.

What happens when you place a trade through a broker?

When you place an order through a broker, it is submitted through a trading platform and processed according to the financial instrument, order type and the broker's execution arrangements. The exact route from order submission to execution can vary depending on the market, product and broker.

The process can be broken down into five main steps: 

1. You place an order

You select the financial instrument you want to trade and enter the details of your order, such as whether you want to buy or sell, the order size and the order type. Depending on the platform and order, you may also set parameters such as a stop loss or take profit.

2. The broker receives the order

Once submitted, the order is transmitted through the trading platform to the broker's trading infrastructure. The broker receives and processes the instruction based on the order details and the product being traded.

3. The order is handled for execution

How an order is handled for execution depends on the market, financial instrument and broker's execution arrangements. An order may be routed to an external venue or liquidity provider, while under some arrangements the broker may act as the counterparty to the trade.

This means that brokers do not necessarily follow the same execution process for every trade.

4. The order is executed or remains pending

Depending on the order type and specified conditions, an order may be executed or remain pending until those conditions are met. An order being submitted does not necessarily mean that a trade has already been executed.

5. The trade is reflected in your account

Once executed, the transaction or open position is reflected in your trading account. You can then monitor the position and, where applicable, manage or close it through the trading platform.

Services a financial broker may provide

Brokers generally provide access to financial markets and handle or execute client orders. Depending on the broker and account type, they may also offer trading platforms, market data, research, educational resources and other investment-related services.

Common broker services include:

• Market access and order handling: Brokers enable clients to trade the financial instruments and markets available through their accounts and process their buy or sell orders.
• Trading platforms: Brokers may provide their own platform or access to third-party trading technology through which clients can view markets, place orders and manage positions.
• Pricing and market data: Depending on the service, clients may have access to live or delayed prices, charts and other market information used to follow price movements.
• Research, tools and education: Some brokers provide market analysis, economic calendars, screeners, educational materials, demo accounts or other resources that can help clients research markets and understand how trading works.
• Investment advice or recommendations: Some brokers may offer investment recommendations or other advisory services where these form part of their offering and are permitted under the applicable regulatory framework.

The services available can differ significantly from one broker to another, making it important to understand which services a broker provides and whether additional fees or conditions apply.

How do brokers make money?

Brokers use different pricing models to generate revenue from the transactions and services they facilitate. Depending on the broker, product and account type, costs may be built into the spread, charged separately as a commission or applied through other fees.

Spreads and markups

The spread is the difference between the buy and sell prices of a financial instrument. Depending on the broker's pricing model, the spread may include a markup that contributes to the broker's revenue.

Spreads can vary between instruments and may change with market conditions and liquidity. Under different pricing models, trading costs may be reflected primarily in the spread, charged separately as a commission or structured as a combination of the two.

Commissions and other fees

Some brokers charge commissions for executing trades. The way commissions are calculated can vary according to the instrument, trade size or account type.

Beyond spreads and commissions, other charges may apply depending on the broker, product and service. These can include financing charges on certain positions, account-related fees or charges for particular services. Clients should therefore review a broker's pricing and fee information to understand which costs apply to their account and trading activity.

Types of financial brokers

Financial brokers can be categorised in several ways: by the services they provide, the markets or products they cover, or their approach to order execution. These categories can overlap, so a broker may fit into more than one type.

Brokers by service model

One way to distinguish brokers is by the level and type of service they provide:

• Full-service brokers: May combine trade execution with additional services such as investment research, recommendations and portfolio-related support.
• Discount brokers: Typically focus on market access and trade execution, with clients making their own investment or trading decisions. The exact services and pricing available vary between brokers.

Brokers by market or product

Brokers can also be described according to the financial markets or products they provide access to. Examples include:

• Stockbrokers: Facilitate transactions in shares and, depending on their offering, other securities.
• Forex brokers: Provide access to the foreign exchange market and enable clients to trade currencies or related products.
• Derivatives brokers: Provide access to derivative products such as futures, options or CFDs, depending on the broker, market and jurisdiction.

Some brokers specialise in a particular market or product, while others provide access to several asset classes through a single account or platform.

Brokers by execution model

Brokers can also be described according to their execution arrangements. Common industry terms include:

• Market maker: In a brokerage context, a market maker may quote buy and sell prices and, depending on the arrangement, act as the counterparty to a client's trade.
• Straight-through processing (STP): Generally refers to electronic processing in which orders move through the execution process with limited or no manual intervention. The specific routing and execution arrangements can vary between brokers.
• Direct market access (DMA): Refers to arrangements that allow orders to be submitted to an underlying market or trading venue through a broker's infrastructure, subject to the market and service offered.

These terms can mean different things depending on the broker, product or market. Rather than relying on a label alone, check how the broker actually executes orders and what terms apply.

Broker, brokerage, trading platform and exchange: what’s the difference?

A broker helps clients carry out transactions in financial markets, while a brokerage is the business or service that provides this access. A brokerage firm is the company that offers these services.

A trading platform is the technology clients use to place and manage trades, while an exchange is a marketplace where financial instruments such as shares can be bought and sold.

Although these terms are sometimes used interchangeably, they refer to different parts of how financial markets work.

Broker vs brokerage firm

A broker can refer to an individual or firm that facilitates financial transactions, while a brokerage firm specifically refers to the business entity through which those services are provided to clients. Those services can include market access, order handling and trading technology, as well as research, education or other services.

In everyday usage, broker is often used to refer to the brokerage firm itself, particularly in online trading.

Broker vs trading platform

A broker provides brokerage services, while a trading platform is the software or technology through which clients interact with those services. A platform can allow users to view prices and charts, place orders and monitor or manage positions.

The platform may be developed by the broker or supplied by a third-party technology provider. Using a particular trading platform therefore does not necessarily mean that the platform provider is also the broker.

Broker vs exchange

A broker provides clients with access to financial markets and handles their orders, while an exchange is a marketplace where eligible financial instruments can be bought and sold.

Depending on the market, product and execution arrangements, a broker may route an order to an exchange or another venue, while other transactions may be handled through different execution arrangements.

What should you check before choosing a broker?

Before choosing a broker, consider its regulatory status, costs, available markets and products, trading platform and account conditions. What you look for in a broker will depend on the markets you want to trade and the services that matter to you.

Key factors to consider include:

• Regulation and authorisation: Check whether the broker is authorised to provide the relevant services in your jurisdiction and verify its regulatory status with the relevant financial regulator.
• Markets and products: Check which financial instruments and markets are available and whether they match what you want to trade.
• Trading costs: Compare spreads, commissions, financing charges and any other fees that may apply to your account or trading activity.
• Execution and trading platform: Check how the broker executes orders and what features and tools are available on its trading platform.
• Account conditions: Review the available account types, deposit and withdrawal methods, minimum funding requirements where applicable, and other relevant account conditions.
• Support and resources: Consider the customer support, educational resources, research and market tools available, particularly where these services are important to you.

Considering these factors together can provide a more complete view of a broker's offering than focusing on trading costs or any other single feature alone.