Ultimate Guide: What is a Broker? What Does It Do?

The financial market is full of terms that, for those who begin to venture into it, will seem confusing, and when they want to understand them, they tend to become more entangled. Therefore, with this guide, we intend to achieve several objectives, such as paving the way for those who are starting in Forex, strengthening terms for those who already have time working in the market, and giving tools to IBs and Money Managers who want to explain to their new clients what a broker is.

Similarly, it is necessary to emphasize that if you want to access the foreign exchange market, which is not a physical space, you can do so through brokers.

Hence the importance of brokers as a fundamental part of the actions you want to undertake as a Forex trader. So if you want to be part of this world or you already are and want to consolidate some terms, Smart Broker Solutions invites you to read this guide and have it as reference material. Let’s get started.

What is a broker?

A broker is a person, economic operator, or company that acts as an intermediary between buyers and sellers of financial instruments. Brokers can work in different markets, such as stocks, currencies, or commodities.

By performing this intermediation work, brokers earn money through commissions or fees.

What does a broker do? Know your roles

The primary mission of these companies is the intermediation with their clients in the financial markets; however, they fulfill several functions that complement their principal work, among them:

1. Financial advice

Brokers usually advise their clients on the financial instruments in which they wish to invest; this includes information on the risks and rewards of each financial instrument, as well as market trends.

2. Portfolio Management

Some firms offer portfolio management services, where they manage investments on behalf of their clients to maximize their returns.

In this case, the broker is responsible for selecting the appropriate financial instruments and managing this investment portfolio according to the client’s objectives.

3. Research and analysis

Brokers can conduct market research and analysis to help clients make informed investment decisions. They also send alerts on the most convenient quotes and trading schemes.

To do this, the broker must have a robust CRM platform capable of adapting to your company’s objectives and clients’ needs. If you own what a broker is as a company and do not have this type of platform, at SBS we offer you the most successful solution in state-of-the-art technology.

4. Custody Services

In addition to client data storage and protection, brokers can offer custody services for their client’s assets, keeping them safe and secure.

Types of brokers

According to what defines them and how they execute their work, we have three types of stockbrokers:

Market Makers or (DD)

Market Makers, who in turn are known as Dealing Desk (DD) Brokers, are responsible for connecting the foreign exchange market with retail traders.

Executing Forex trades requires liquidity that clients lack. So a trading desk broker “makes the market” by purchasing large volumes and offering them to their clients in smaller, more accessible pools of securities.

Broker STP

Brokers that work with the STP (Straight Through Processing) system are also known as Direct Market Access Brokers (DMA). Another form of the denomination is Brokers without Dealing Desk (NDD).

They offer the link that their clients need to have access to the foreign exchange market, where banks or financial institutions are the ones that execute directly and provide the liquidity that traders require.

Broker ECN

Electronic Communication Network (ECN) brokers disseminate what their clients wish to execute in the market. The difference concerning Market Makers is that ECN brokers do not necessarily connect with liquidity providers.

In some cases, orders are transmitted to other Forex market operators and perform the role of lead brokers in execution.

What does a broker study?

To perform their role as a broker, they must have solid knowledge about the financial markets, their movements, types of clients, actors, and instruments in which they work.

These companies or individual players must handle the technical analysis of the market to advise their clients so that they can make investment decisions with as much information as possible.

A Forex broker usually studies finance, economics, or management.

Is a trader the same as a broker?

Although these two terms are often used interchangeably, a trader and a broker in trading are quite different. A trader is a person who buys and sells financial instruments on their behalf, and a broker is an intermediary who facilitates the buying and selling of financial instruments on behalf of traders.

The broker gives the trader the possibility to execute their investments in Forex.

What commission does a broker charge?

The commissions charged by an intermediary may vary depending on the type of service offered and the internal policies of each company. Therefore, there are variations between companies that provide brokerage services in buying and selling and account management or advice.

In conclusion, knowing what a Forex broker is, as an intermediary in the foreign exchange market, can clarify certain confusions that arise when wanting to enter a market such as this one, so dense and with so many details.

At Smart Broker Solutions, we have all the tools to get you started on the right foot in Forex, either from a company that adapts to what you need or as a consolidated broker that needs the technological tools to help you position yourself. Contact us and start investing like the big guys.

Rodrigo Insua

Avatar of Rodrigo Insua

Head of Marketing en Smartbrokersolutions. Coordination and management of online and offline marketing campaigns.