A broker is your gateway to the market: it streams prices, routes your orders, margins positions, and safeguards client funds. Knowing how brokers operate and how execution works helps you choose the right partner and align execution quality with your strategy.
What a broker actually does
Brokers provide market connectivity, pricing, execution, platforms, margining and custody. They earn via spreads, commissions, and swaps (overnight financing).
They must meet regulatory standards, KYC/AML, and (in solid jurisdictions) keep segregated client funds.
Broker models: Market Maker vs. STP/ECN (A-book/B-book)
- Market Maker (MM): “Makes the market” and may take the opposite side of your trade. Often fixed spreads and fast fills. Can internalize small flow and hedge externally if imbalanced. Risk: potential conflict of interest if mismanaged.
- STP (Straight-Through Processing): Routes orders to external liquidity providers (banks, prime brokers). Variable spreads plus a commission or small markup.
- ECN (Electronic Communication Network): Aggregates quotes from multiple LPs and matches orders in an electronic book. Ultra-tight spreads + explicit commission.
- A-book/B-book: Internal jargon. A-book = out to LP/market (STP/ECN). B-book = internalized (MM). Many brokers run hybrid routing based on size, symbol, and liquidity.
Execution types: instant vs. market, NDD vs. Dealing Desk
- Instant execution: you request a quoted price; if it changes, you may get a re-quote.
- Market execution: you accept the best available price (subject to slippage, positive or negative).
- Dealing Desk (DD): internal desk may filter/validate prices and exposure.
- No Dealing Desk (NDD): direct routing (STP/ECN) with minimal human intervention.
Pricing, costs, and execution quality
- Spread: Bid/Ask difference. Fixed (predictable; can widen on events) vs. variable (narrows with higher liquidity, widens in thin markets).
- Commission: per-volume fee (typical on ECN).
- Swap/financing: debits/credits for holding overnight.
- Slippage: price movement between click and fill.
- Re-quotes: price rejected/changed (more common on instant).
- Partial fills: large orders filled across multiple price levels.
Infrastructure and liquidity: from click to market
Order path:
- Client platform → broker servers.
- If A-book, via bridge to LP aggregator/ECN.
- Aggregator finds best price/size and executes.
- Fill confirmation back to your terminal.
Latency, routing quality, and market depth shape execution. Active traders may use a low-latency VPS near broker servers and avoid ultra-thin liquidity windows to reduce slippage.
Risk, margin, and client protection
- Leverage & margin: higher leverage lowers margin requirement but raises margin call/stop-out risk.
- Negative balance protection: avoids client debt in extreme moves (jurisdiction-dependent).
- Segregated funds & regulation: protect deposits if broker issues arise.
- Best execution policy: obligation to pursue best overall outcome (price, cost, speed).
How to choose broker and execution for your strategy
- Verify regulation, segregation, reputation, and support.
- Compare real spreads/commissions on your instruments and hours.
- Request execution reports (avg slippage, fill rate).
- Test on demo then small live: latency, re-quotes, stability.
- Match model to style: Scalpers often prefer ECN (tight spreads + explicit commission); Swing may tolerate wider spreads; be cautious around news when spreads widen.