Trading knowledge libraryWhat Is a BrokerMarket Basics
Market Basics
What Is a Broker
A broker is the company that sells you access to the market and decides how it reaches you. This paper shows you what sits between your screen and the market, the two things a broker can do with an order, what it takes out of one real trade in dollars, the week your account really gets, how to read the four numbers on a contract specification, and how to check a firm's licence.
Most people starting out picture the platform as a window onto one big market where everyone meets. It is not a window. It is a product. Your account exists inside one company's systems, and the prices in it are that company's prices. That company is the broker. It sells you access to the market and decides almost everything about how the market reaches you: the prices on your screen, the hours your account can trade, the cost of each trade, and whether your order leaves the building at all.
Two things it can do with your order
When you press buy, one of two things happens. In the first, the broker passes your order out to banks or a pool of other participants. It earns its money from the spread — the small gap between the price you can buy at and the price you can sell at — and from a commission per trade. It makes the same money whether you win or lose. In the second, the broker matches your order inside its own building and becomes the other side of it. It still earns the spread, and it also keeps what you lose.
The second arrangement is legal and common, and most retail firms do both, routing clients between them. What it means is a conflict of interest that exists whether or not it is acted on. Which kind you have is usually written in the firm's execution policy.
