What Is a Broker?

What a broker actually does

A broker is a company that sits between you and the financial markets. Without one, you cannot place a trade. You give the broker an instruction, and the broker acts on it.

The mechanics work like this. You open a trading account with a broker and deposit funds. When you decide to buy or sell an instrument, say EUR/USD or a share in a UK-listed company, you submit an order through the broker's trading platform. The broker receives that order and routes it, either to an external liquidity provider, to an exchange, or by taking the other side of the trade itself. Once your order is matched and filled, the broker confirms the execution and updates your account balance to reflect the open position.

The broker also holds your trading capital. Your deposited funds sit in an account in your name, managed by the broker on your behalf. When you close a trade at a profit, those funds are added to your balance. When you close at a loss, they are deducted. When you withdraw, the broker sends the money to your nominated bank account.

Beyond execution and custody, brokers provide access to market data, charting tools, and in many cases educational content. The trading platform you use every day is almost always supplied or licensed by your broker. Some brokers build their own platforms; many licence established software such as MetaTrader 4, MetaTrader 5, or cTrader.

How brokers make money

Brokers earn from three main sources: spreads, commissions, and overnight financing charges.

The spread is the gap between the price at which you can buy an instrument and the price at which you can sell it at any given moment. If EUR/USD has a buy price of 1.08502 and a sell price of 1.08490, the spread is 1.2 pips (a pip, or "percentage in point", is the smallest standard unit of price movement in forex). That gap is the broker's cut on every trade you open. A spread of 1 pip on EUR/USD means you begin each trade 1 pip in the red. The market has to move in your favour by at least that amount before you break even. The spread is not a hidden fee; it is simply the cost of access, built into the price.

Commission is a flat fee charged per trade or per lot traded. It is more common with ECN and STP brokers, which offer tighter raw spreads and make up the difference by charging a fixed amount per transaction. Commissions are transparent and predictable, which many active traders prefer.

Overnight financing, often called a swap or rollover charge, applies when you hold a leveraged position past the daily market close. Because leveraged positions involve borrowing, there is an interest cost attached to holding them overnight. That cost varies by instrument and by the interest rate differential between the two currencies in a pair. It can occasionally be positive, meaning the broker credits rather than debits your account, but in most common positions it is a charge.

It is sometimes claimed that market maker brokers profit when clients lose. The relationship is more nuanced than that. A market maker manages its aggregate book and hedges its exposure. Its long-term interest is in active, trading clients, not in rapid losses. That said, there is a structural difference between a broker that routes your order directly to external markets and one that internalises it, and that difference is worth understanding.

Types of broker

The two primary structural models in retail trading are the market maker and the ECN/STP broker.

A market maker quotes its own prices and takes the other side of your trade. If you buy, the market maker sells to you. The market maker manages its overall book and hedges its net exposure in the wider market. The model allows fixed or tightly controlled spreads and suits smaller accounts well because there is no minimum trade size imposed by external liquidity providers. The simplicity of a single all-in spread makes cost calculation straightforward.

An ECN (Electronic Communications Network) or STP (Straight-Through Processing) broker routes your order directly to external liquidity providers: large banks, institutional desks, and other market participants. You trade on raw market prices with very tight spreads, but the broker charges a commission per lot to generate revenue. The execution is typically faster and the pricing more transparent. Active traders who place many trades benefit from the lower per-trade spread cost, provided their volume makes the per-lot commission worthwhile.

What FCA regulation actually means for you

In the UK, any firm offering financial services to retail clients must be authorised by the Financial Conduct Authority (FCA). Authorisation is not a formality. It requires firms to meet capital adequacy requirements, adhere to conduct rules, report to the regulator, and, crucially, segregate client funds.

Segregated client funds means your money is held in a separate account from the broker's own operating capital. If the broker runs into financial difficulty, your funds are not part of its asset pool. They belong to you, not to the broker's creditors.

UK retail clients also benefit from the Financial Services Compensation Scheme (FSCS), which provides a level of protection if an FCA-authorised firm fails and cannot return client money. The FSCS is a safety net, not a guarantee, and it does not cover trading losses. It applies only when the firm itself fails.

The FCA Register at register.fca.org.uk is the definitive source for checking whether a broker is genuinely authorised. Every FCA-authorised firm has a unique reference number. If a broker cannot point you to its entry on the FCA Register, treat that as a serious concern.

What to check before opening an account

Opening a broker account takes minutes. The decision of which broker to use deserves considerably more thought. Five things are worth checking before you deposit any money.

FCA authorisation comes first. Look up the broker's name or reference number on the FCA Register. Confirm the authorisation is current and covers the specific services you intend to use.

Second, check the spreads on the instruments you plan to trade. A broker may advertise very tight spreads on EUR/USD but wider spreads on GBP/JPY or indices. Compare the actual trading costs on your intended instruments, not just the headline figure.

Third, verify the platforms on offer. Your ability to execute your strategy depends on having software that fits your workflow. Common options are MetaTrader 4 (MT4), MetaTrader 5 (MT5), cTrader, and the broker's own proprietary platform. If you already have a preferred platform, confirm the broker supports it before you apply.

Fourth, check the withdrawal process. The most common complaint against poor-quality brokers is difficulty accessing funds. Reliable brokers process withdrawals within a clearly stated timeframe, via the same method used for the deposit. Independent review sites and the FCA's own complaints data are useful here.

Fifth, check any minimum deposit requirement and whether it is appropriate for the position sizes you intend to trade.

Broker vs platform vs exchange

Three terms often get used interchangeably. They mean different things.

The broker is the regulated legal entity. It holds your money, executes your orders, and is accountable to the FCA. It is the company you have a contract with.

The platform is the software you use to place trades and view charts. MetaTrader 4 and MetaTrader 5 are the most widely used retail trading platforms globally. cTrader is popular with ECN brokers. TradingView is used primarily for charting, with some direct execution functionality. Your broker may offer one or several of these, or it may have built its own platform entirely. The platform is not the broker. Many different brokers use the same platform software.

The exchange is the centralised venue where securities are listed and traded. The London Stock Exchange (LSE) is where UK-listed company shares trade. The New York Stock Exchange (NYSE) and Nasdaq are US equivalents. For forex, there is no single centralised exchange; it is an over-the-counter market with no central venue.

As a retail trader, you almost certainly never interact directly with an exchange. You interact with your broker, through your platform. The broker handles the connection to the exchange or liquidity pool on your behalf. Understanding this distinction matters because it shapes what protections apply and who bears responsibility for what. The broker is your counterparty and your point of recourse. The platform is simply the tool.