What are brokers or brokers?
Definition of broker
A broker is an individual or company (brokerage firm) that organizes transactions between a buyer and a seller, and gets a commission once the transaction is executed. In other words, he is an actor who serves as an intermediary between the two parts of a purchase/sale transaction and charges a commission for his services as a profit.
In general terms, a broker is an independent agent that is used extensively in some industries. The primary responsibility of a broker is to collect buyers and sellers so they can negotiate with each other using the broker himself as an intermediary. Therefore a broker is a facilitating agent for transactions between buyers and sellers. An example could be a real estate broker that makes it easier to sell a property.
Brokers can also provide considerable market information regarding prices, products and market conditions. Depending on the case, brokers can represent the seller (90% of the time) or the buyer (10% of the time) but not both at the same time. An example could be a stockbroker, which makes the sale or purchase of shares on behalf of your client. Today, brokers play a key role in the purchase/sale of stocks, bonds, futures, currencies and other financial services.
There are several advantages to the use of a broker. First of all, they know the market and have usually established relationships in the industry that allow them to offer market access that they could never have many investors on their own. Brokers have the resources and tools to reach the largest possible base of buyers and sellers. Many brokers are related to large banks or other financial institutions, which gives them access to more resources. Another benefit of the use of brokers is the cost, as they can be cheaper as in the case of forex, where there are companies that allow opening accounts with low start-up capital and charge relatively cheap commissions compared to other financial markets.
Previously, only wealthy people could afford the costs of a broker's services to access markets. However, the internet enabled the emergence of online brokers (discount brokers), which allow investors to operate at a lower cost, although they do not provide any kind of personalized advice (in some cases only). Thanks to these brokers, almost anyone has the possibility to operate in the markets.
Before you open an account with a broker and pay for your services, whatever market the investor is investing in, it is important to devote the time needed to investigate the best options of these companies or individuals, and to choose that broker that presents the best conditions and best suits the needs of the investor. For example, if we want to invest in the US stock market, it is advisable to choose a duly accredited and regulated broker, which complies with the stringent financial services regulations in that country. On the other hand, a trader interested in the Forex market must choose a broker that has a good reputation and that is registered and regulated by one of the most important financial regulatory agencies in Europe or the United States for example.
Brokers or brokerage firms (brokerage firm)
A brokerage firm, or simply broker, is a financial institution that facilitates the purchase and sale of assets or financial instruments between a buyer and a seller. Brokerage firms serve a clientele of investors negotiating with assets and instruments of different types as shares, currency pairs, raw materials, derivatives and many others, usually through the company's agents or through tools such as electronic trading platforms, whose use is increasingly disseminated between traders and investors around the world. In the case of the stock market, these firms use both trading platforms and broker-dealers to carry out their clients ' transactions on the market.
A traditional brokerage firm (brokerage firm) offering full service to its customers, usually performs more functions than simply executing transactions with shares or other financial assets on behalf of its customers. The staff of this type of brokers are given the responsibility to investigate and analyze markets to provide appropriate recommendations in such a way that they can direct the actions of their clients, which in some cases may include managers of investment portfolios and pension fund managers. These firms also provide additional leeway for certain approved customers to be able to make investments on credit, which are subject to conditions and terms agreed between the two parties. Traditional brokerage firms have also become a source of updated quotes from the various assets and financial instruments they offer to their customers.
Online brokers (Discount brokers)
A discount broker or online broker, is a company that charges a relatively small commission by allowing the execution of the transactions of its customers in the market, through computerized trading systems (the electronic trading platforms used by many brokers today), instead of using the services of a human agent or broker to place orders on the market. At present, most traditional brokerage firms also offer low-cost online trading options and strongly compete to attract customers and their money for which they are rapidly changing to this method of operation in the markets, which is not only less expensive but also more efficient.
Today, the majority of forex brokers, for example, operate as brokers online and offer their customers the possibility to operate on the forex market from any Internet-connected site through a trading platform. This allows these companies to offer a fairly low cost service compared to other markets. A similar trend is being seen in other markets, such as the stock market or futures, in which the brokers are guiding their services towards online trading platforms.
Another of the ways that some brokers employ to reduce costs is by executing orders only a few times a day, for which they add orders from a large number of small investors into one or more transaction blocks that are created at certain specific times during the day. This allows you to reduce costs in two ways:
By matching buying and selling orders within the signature's order book, the total amount of the asset to be negotiated can be reduced, which in turn reduces the commissions that the broker has to pay to others.
The broker can divide the bid-ask spread with the investor when it matches the purchase and sale orders – a win-win situation in most cases.
In the case of stock market brokers for example, since investor money is combined before the purchase or sale of shares, this allows the inverse to contribute with relatively small amounts of money with which fractional shares of specific actions can be acquired. This is usually not possible with a regular stockbroker.
Types of Brokers
There are different types of brokers today, which can be classified both by the way they operate and by the assets or instruments they offer their customers to negotiate on the market. For example, some brokers offer access to the stock market, while others specialize in the forex market or in futures contracts for example. Some even allow their customers to operate with different types of instruments, such as forex brokers offering dozens of currency pairs, commodities, different asset-based contracts and others.
Next we will explain some types of brokers according to the way they operate and offer their services to their customers to access the financial markets.
ECN Brokers
An ECN broker is a company that uses electronic communication networks (ECN) to offer its customers direct access to other market participants. In other words, it is a company that offers the trader direct access to the market. Because an ECN broker consolidates price quotations from different market participants, it usually allows its customers to operate with variable bid/ask spreads and adjusted to which they do not have access through other brokers.
Since an ECN broker only matches the orders between market participants (it acts as an intermediary between its customers and other market participants), it cannot operate directly against the client, a complaint often directed against some brokers, such as market maker-type Forex brokers. Because the spreads of ECN brokers are much narrower compared to those offered by other brokers, these companies charge their customers a fixed commission for each transaction.
Definition of electronic communication network – ECN
It is an electronic system which aims to eliminate the role of a third party in the execution of orders introduced in the market by a market maker, whether in a centralized market or stock market or over the counter, and allows such orders to be partially or totally executed.
Basically, an ECN connects the main brokers and individual traders, so that they can operate negotiating with each other, without having to use the services of an intermediary.
The brokers market maker
A broker market maker is a firm that accepts the risk of maintaining in its possession a certain amount of an asset or financial instrument in particular to facilitate the negotiation with that asset. Each market maker competes for the flow of customers ' orders (speculators and investors) showing the purchase and sale quotes for a guaranteed amount of the asset, that in this case it can be an action, a pair of currencies, a raw material or any other type of instrument negotiated in the market.
Once you receive an order, the market maker immediately sells from your own inventory or looks for a compensation order. This process takes a few seconds or even less depending on the size of the order.
Nasdaq offers an excellent example of how market makers operate. There are more than 500 firms that act as Nasdaq market makers, and keep this financial market running efficiently because they are willing to quote both bid and ask prices for an asset.
ECN Brokers vs. Brokers market maker
The brokers market maker has a system that offers purchase prices (BID) and sales (ask) of the various instruments offered to its customers. They have a technology that allows them to make transactions at these prices with their customers, which include banks and individual traders. As a counterpart of each transaction in terms of prices, the market maker has to cover the operation in the market using its own capital. This means that every time the trader buys, the market maker sells and vice versa.
In the event that it covers the operation in the market, the income of the broker comes from the spread. The spread is the difference between the bid and ask price of an asset, and in the case of the market makers they load an additional amount on the spread they obtain from the market, which is their profit for each operation of their customers. It is for this reason that they generally offer wider spreads than ECN brokers. In the case of the forex market, the spread is measured in pips (the smallest unit of variation in the price of a currency).
Sometimes the broker can choose to become the counterpart of his clients and not cover the transaction of this. In this way, everything the client loses becomes profit for the market maker. For this reason, the market makers can present a clear conflict of interest when executing orders against their customers. Those who are unscrupulous can put themselves to work against the trader.
On the contrary, with an ECN broker there is no conflict of interest since the company never operates against the client. This is because the broker is looking for a counterpart for the orders of his clients in the market so that he never acts as his counterparty, so he doesn't need to compensate for open positions. Through the ECN network, the broker matches the orders of his clients with those of other traders, so his earnings come from the commissions that charge for each operation and/or the spread. In this way, the ECN broker never has any interest in the trader losing in its operations, quite the opposite.
Types of brokers according to the markets they offer their customers
Below is a classification of the brokers according to the assets and financial instruments (including derivatives) that offer their customers to Quen invest and speculate in the markets. As noted above, many brokers offer access to various markets, making it possible for a trader to operate on the forex market or with contracts for difference in one account and through a single trading platform.
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