What is the role of a broker and what to look out for when choosing one

Just as you need an ISP to access the Internet, you need a broker to access the markets. Fortunately, in this day and age of online trading, this no longer means contacting your chosen broker dealer in person or over the phone. You only need to open a trading account directly on the website of your chosen broker. You then send the money you are trying to multiply by trading on the financial markets to that account and you are all set.

But there are many brokers and they differ not only in the services they offer, but also in how they process your orders or in which country they are licensed. So what to look out for when choosing a broker and what to look for in a broker? We will get to all that, but first let's explain what a broker actually is.

What is a broker

Brokers serve as an intermediary between individual selling and buying investors/traders and the intricate world of the financial markets where they match their orders. They are able to do this thanks to their technological infrastructure and the connection of their servers to other financial market entities (e.g. liquidity providers), but also thanks to their license. This is because each broker must comply with the rules defined by the regulator - a financial entity that has issued the broker with a licence authorising it to carry out brokerage services.

It is the type of infrastructure of a broker and its license that will tell you a lot about how a broker is likely to treat you. Specifically, how it will process your orders and to what extent it will protect you from the pitfalls of the market.

Broker type by trading infrastructure model

The way a broker handles your trading orders is determined by the type of its trading infrastructure model. Although there are several types of brokers, the most commonly mentioned are the STP (Straight Through Processing) and MM (Market Maker) models.

1. STP model

   We wrote in the introduction that a broker serves as an intermediary between its clients and the world of financial markets. And that is exactly what applies to the STP model of broker. In fact, its infrastructure model and its license allow it to take its clients' orders and send them into the market with a tiny margin. Here, it then pairs them with the orders of the counterparty (the so-called liquidity providers). An STP-based broker therefore has zero room for ulterior motives and unfair order manipulation.
    

2. MM model

   A broker based on the Market Maker model has enough liquidity to counterparty its clients entirely on its own. Their orders therefore do not flow into the actual market, but take place in the so-called Internal book. These brokers usually have lower spreads, but not all traders are comfortable with the fact that their orders do not flow into the actual market and consider this model less moral. Although there have been a few cases in the past where MM brokers have covertly manipulated their clients' orders, nowadays it is possible to find solid brokers even on an MM basis.

Read more about the comparison of broker types

Try trading with a broker based on the pure STP model

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