Lesson 8 of 11 · 8 min
How brokers work
What a broker does with your order, the two main broker models, and the three ways they get paid.
By the end you'll be able to
- Describe the difference between a market maker and an STP or ECN broker
- Name the three costs of a trade and calculate them for a position
- Explain why regulation is the first thing to check in a broker
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Your broker is your only door to the market. It holds your money, sets your prices and fills your orders.
Two ways a broker can handle your order
Tap a broker model to see where your order goes.
A market maker fills your order itself. When you buy, it sells to you from its own book. It may pass the risk on to the banks later, or keep it. Spreads are usually fixed or stable, and the broker can profit when clients lose on trades it did not hedge.
An STP or ECN broker passes your order straight through to its liquidity providers, the large banks. Spreads are variable and often tighter, and the broker is paid through a small mark-up or a commission rather than by taking the other side.
Neither model is automatically bad. Large, regulated market makers run perfectly fair businesses. Check which model your broker uses and that it is regulated.
The three costs
Every trade has up to three costs:
- The spread, paid when you open.
- A commission, charged per lot by some brokers, usually in exchange for a tighter spread.
- The swap, the overnight interest paid or earned for holding a position past the day’s end. It can be positive or negative depending on which currency has the higher interest rate.
Try it
Spread = pips × $10 × lots. Commission and swap are quoted per lot. A trade must earn more than the total before it makes anything.
Notice how the swap is small on one night but grows every night you hold, while the spread and commission are paid once.
Regulation first
Before costs, before platforms, before bonuses: is the broker regulated by a serious authority (for example the FCA in the UK, ASIC in Australia, CySEC in the EU, or the CFTC and NFA in the US)? Regulation means client money is kept separate from the firm’s money, leverage is capped, and there is someone to complain to. An unregulated broker offering 1:1000 and a deposit bonus is a warning, not a bargain.
Quick check
Question 1 of 3
What does a market maker do with your buy order?
Question 2 of 3
Which cost depends on how many nights you hold a trade?
Question 3 of 3
What is the first thing to check about a broker?
Go deeper: How does forex trading work? · ECN vs market maker brokers