✅ A broker is a financial intermediary. When you want to put to work your money and to buy any financial product, you need a broker. ✅
The question “what is a broker?” it seems more than obvious… When you have years of operating in the markets of the hand of any broker, of course.
But when you start talking with people around you, you realize that the film and news published by people outside the markets, did disservice to help understand who is who in the world of trading.
A broker is a financial intermediary between the trader and the markets. When you want to put to work your money and buy some financial product to obtain a return, you need the broker to be able to do it.
The word broker, as you can imagine, is English. Its translation into the language of Cervantes, you and I, we understand, is runner. In Spanish we use it to identify an insurance broker, or a real estate broker. In short, an intermediary that helps us to make a purchase or a sale. Therefore, the word can be used to define a broker without more.
In this article, we are going to focus on a broker as a figure of the financial intermediary. This figure, it is essential to operate in the foreign exchange market, which is the market that we operate in Quantgemfx.
📝How to open or to become a broker?
If we want to mount a broker, we must meet a number of requirements. Let’s take the case of a broker in Spain, that is the market we know best.
The first step is to register in the CNMV. The National Commission of the Securities Market, the ministry of economy, and is responsible for ensuring and overseeing the proper functioning of the different participants of the financial markets in Spain.
To become a broker, it is not necessary to have any degree in economics or business, as might be expected a priori. Although not required, it is recommended to have at least some knowledge of the industry in which we are going to move. A good financial education is ideal, either with a diploma or self-taught.
🔍Difference between a trader and a broker
Know the difference between a trader and a broker I think that is what confuses most people. It is not strange to see some news in the speaking of any trader and confuse you. It is normal for this confusion, because they are things that are not taught in school. Unfortunately, finances and investments, it seems that they are not important for education systems worldwide.
A trader is a person who performs operations in the financial markets. To perform such operations, a trader needs a broker. The trader or merchant, operates within the broker. This last, is the one in charge of executing all the operations in the market by order of the first.
Therefore, the trader operates in the market with the tools and regulations that the broker offers, in exchange for a commission of intermediation.
For all the world to understand with this analogy, if I want to bet on a football game, I need a betting house that I of the counterparty. In this simile, who wants to bet serious trader, the home of betting the broker and the market will be the football match in question.
📈What is trading?
In the world of finance, we use many words that are English. Trading is one of them, and although to the English-speaking people do not need translation, it is true that for Spanish speakers, may give rise to confusion is the term.
Basically, when a person tells you they are doing trading, you are referring to is trading with something, that is, buying and selling a financial asset.
We may have heard of currency trading, or trading of criptomonedas, or… in short, the person that says that to you, is trading, or trading currencies, criptomonedas, stocks, futures, derivatives or any other product in the financial markets.
To make trading profitable, we have to form, either with a mentor or self-taught, because in internet we can find free information. The problem is to distinguish between the quality information, and that serves no purpose.
Once we train ourselves in the discipline of trading, we have to create a system that is consistent with our personality. A system in which we feel comfortable.
✒Types of brokers
Brokers can be classified by the products in that focus. Example, broker CFDs, futures, cash…
In this article, we will focus on the brokers online, specialized in the forex market. this video we will explain to you what is the forex market
To do this, we’re going to make a classification by the mode in which are executed the orders of their customers.
As seen in the image, there are two main groups of brokers.
📍Broker Dealing Desk (DD)
More known by the initials DD, the brokers Dealing Desk feature “table money“. Within this group we have only the brokers Market Maker or market makers.
📌Broker, Market Maker (MM)
Surely you have heard of this type by their bad fame, because they are market makers. That is to say, that if I buy, they make me the counterpart to a sale, and vice versa. Therefore, if I win, they lose. To the commission of the intermediation of purchase, this type of broker will also win the money deposited by their customers, in case you lose. The operations of their customers don’t actually come out in the market but that are running on the operating table of the own broker.
The first thing we think, if we operate on a Market Maker, it is going to do everything possible for us to lose our money, because if everyone wins, they lose. But the sad reality, is that you do not need to get sweeps, because it takes the market to remind us that about 90% of the traders are going to lose your money in a few months.
A broker / Market Maker does not try to rip us off, but unfortunately, each time a trader loses (as happens with 90% of the traders), will blame the broker.
Look for a guilty party, which of course, will not be the lack of training, greed, ego, psychology, or simply a set of bad decisions. It is so easy to blame the broker, and if this is the Market Maker, since you can’t even imagine, because I know that I have gone to for me… I already understand.
❤Advantages of a broker / Market Maker
Although it may seem illogical that we have advantages with a broker, Market Maker, there are also.
- 📝Usually require little initial capital to open a trading account.
- 📝Without commissions. This type of brokers can be set to the maximum of their brokerage fees, as they are going to win 90% of the money of their clients, therefore, if we are 10% of customers who earn, perhaps we are interested in.
- 📝Trading platforms and tools with many functions. This type of broker, usually have a platform of their own, a part of the traditional Metatrader.
💔Disadvantages of a forex broker Market Maker. Personal opinion
The main disadvantage of operating in a broker Market Maker, is that there is a conflict of interest. That is to say, that my earnings will be a loss to the broker.
Therefore, I think that if I have a system winner in the long term, the broker will not make much grace, and will end up inviting me to change my account type, or simply I can try to sweep stops or put sweeps, in fact.
We can find another type of disadvantages, depending on the limitations that put on each broker, as they can put a minimum distance of our stop, or limit the number of lots that we operate.
🖥Broker Non Dealing Desk (NDD)
A broker Non Dealing Desk has to send out our operations to the market through its liquidity provider. That is to say, that this type does not make it a counterpart to our positions, therefore, there is no conflict of interests. For this type of broker, the more you win in the market, the more time you remain with them by opening and closing positions, that in order to account for them generate commissions. Have the same interest as us in that win.
We can distinguish two main types of brokers NDD.
🔢Brokers STP (Straight Through Processing)
A broker STP sends the operations that we run, directly to their liquidity providers. A liquidity provider is usually large banks and financial institutions, like Deutsche Bank, Bank of America, Barclays, Goldman Sachs, JP Morgan, CitiBank, HSB, and other big firms. The operations are executed directly in the market.
The spread of this type is variable. That is to say, that the commission that we will charge for each transaction that you make, it is usually not fixed, because it depends on the time of market volatility, and the liquidity provider, who offers the execution prices of market.
💰Brokers ECN (Electronic Communication Network)
This type of broker, this is very similar to the STP, with the difference that here, a part of their liquidity providers, forming a network between liquidity providers, clients and other brokers, showing you the best prices, chosen between all participants of the market.
The spread, as with the STP, are variable, and on occasions they get to have a zero spread. The total cost for our operation on a broker, ECN, is a commission fixed by the size of the position plus the spread.
After this small review to try to clarify differences between the trader, the broker and the different types, and we expect it to be more clear when choosing your broker. You can help by using any page of review of a broker.
💸The best brokers online in Spanish
To choose the best broker, the first thing that we must ask ourselves, is what market we are going to operate. There are brokers that specialized in the stock spot. Other brokers use financial derivatives such as CFDs. There are brokers of futures, options, warrants…
Although a broker may encompass different products, usually, specialize in a few.
The best broker will be regulated, has an unblemished record, and we offer a personalized service and products in line with our expectations and investment needs.
Frequently asked questions
✅What is a broker?
A broker is a financial intermediary between the trader and the market in general. The broker provides us with the tools necessary to do financial transactions.
✅What is a provider of market liquidity?
A broker can be a liquidity provider, but in general, a liquidity provider is a bank or entity that ensures that our orders are running in the market.
✅What types of brokers are there?
In understandable language, we will say that there are two types of brokers, market makers that make a counterpart to the trader, and the brokers and sent our orders to the market, through the liquidity provider.
✅How I can open an account with a broker from Latin America?
Yes, we can have an account with a broker from Argentina, Panama, Venezuela, Colombia, Chile, Mexico, Bolivia, Dominican Republic, Brazil, El Salvador, Uruguay, Peru, Paraguay…✅Do I have to declare my winnings to the treasury?
All the profit that we get by doing trading in our broker, we must declare them in the country of tax residence, where we are registered.