Many traders, both new and even some experienced unknowingly believe that all brokers are one and the same. This is however not the case. Each broker although they may offer similar platforms and markets operate very different models. It is vital that before you start trading you are aware of exactly what these types are to ensure you have the best experiences whilst in the markets. To find out more, please see below, where we discuss each type in detail.
Types of brokers:
To understand the type of brokers which operate the market you need to understand the business. How do brokers make money? Generally from spreads and commissions generated from trading volume, and also from providing direct liquidity to traders. Meaning if a trader loses money the broker profits. If a trader however profits then the broker loses as the broker would be paying them out.
Market makers essentially take the other side of a traders positions. They take the risk by providing the liquidity for the trade. There will also be a market, however when the broker operates as the market maker is when this becomes a conflict of interest. Market makers tend to offer guaranteed stop losses and some do offer zero spreads as they hope to profit from losses rather than spreads or commissions.
Straight through processor, matched principal broker or direct market access provider. These many names essentially mean the same thing, forwarding a traders position into the market for a commission/spread. This type of broker takes zero risk as they aren’t providing liquidity, they are the bridge between traders and a pool of liquidity providers.
Electronic communications network. ECN brokers operate a similar model to STP/DMA providers in the sense that they do not provide liquidity. They usually provide access to a smaller pool of liquidity, which are a selective network to make spreads lower.
ECN vs DMA/STP vs Market Maker – Which type should I use?
There are also brokers that take an agency model as their structure, which is basically just a broker without a dealing desk but for more information and the best brokers that fit this see our ‘Agency Model‘ page.
The emergence of the internet has basically forced most brokers online, however some do it better than others, see our list of preferred online brokers.
If you are looking for your broker to tick several pieces of criteria, then see our other lists of broker categories and how we rank certain brokers: