Definition of Online Trading Broker
If you have decided to dedicate yourself to the world of investment, one of the first steps you must take is hire the services of an online trading broker to trade on the stock marketwho acts as an intermediary between your money and your investments, since it is the only professional that is authorized to buy and sell shares. Of course, for this, you no longer have to leave the house.
The broker is the independent institution that acts as an intermediary organizing transactions between buyers and sellers of a financial product in exchange for the collection of a commission at the time the operation is executed.
There are basically two main types of online brokers for trading:
Brokers Dealing Desk: They are the online trading brokers that have a money table, that is, those we know as market makers or Market Makers. They give counterpart to the operations of their clients.
Brokers Non Dealing Desk: They are the online trading brokers that act as simple intermediaries sending the operations to the market. These do not give compensation to individuals, they do not have a money desk nor do they send operations to the market. In this type of Broker we find the STP and the ECN.
Types of online broker to do online trading
As we have seen before, there are two types of online broker with which we can trade online. However, there are actually three different ways to route our trades as a buy or sell trader to the market.
Market Maker Broker
They are called market makers (market maker) because the operations of their clients (traders) do not actually go to the market but are executed on the trading desk of the online broker itself.
Although the prices of financial instruments (currencies, indices, stocks, raw materials, etc.) are practically the same as those offered by other online brokers, the purchase or sale operations that are requested will not go beyond the trading platform of the broker. same online broker.
The broker market maker they create an internal market for their clients (traders) and allow them to buy or sell at any time without having to wait for an operation in the opposite direction to be able to carry out the transaction.
There is spread (spread between the buy price and the sell price) that the broker receives as a commission, by acting as a counterparty the broker can also profit from the losses of its clients or losses from the profits of its clients. This could lead to a conflict of interest between the online broker and its clients, which is why there are traders who directly prefer another type of broker that does not have a money table and send the operations to the market. At Traders Business School we absolutely do not recommend this type of online broker for trading.
ECN (ELECTRONIC COMMUNICATION NETWORK) BROKER.
ECN brokers create a network between their clients and liquidity providers (large financial institutions, banks, other brokers,…). As in the case of STPs, the best spread available at any given time is achieved, but in this case with greater market depth by interconnecting a greater number of participants. There is also no possibility of conflict of interest.
This type of broker acts only as an intermediary between its clients and its suppliers, charging a commission or spread for it without having to make counterparties with its clients (traders), so they do not benefit if the traders have losses with their operations, nor do they they harm if their clients make profits with their operations in the market.
Without a doubt, it is the type of online broker that we recommend to all our students. There are many good ECN-type brokers, which offer a variety of financial products (currencies, stocks, indices, raw materials, etc.) and that are perfectly regulated by organizations such as the FCA, CNMV, etc.
STP BROKER (HYBRIDS).
There are a good number of brokers that are market makers and ECN/STP at the same time because they offer some trading accounts in which they act as market makers and others in which they send the operations to their liquidity providers.
For basic accounts that are aimed at beginners, they usually work as market makers (they allow trading with micro lots, the available leverage is higher, some offer fixed spreads,…) and for more advanced accounts aimed at professional traders, they operate as an ECN or STP broker. .