How does a broker work?

Sergey Golubev  

Forum on trading, automated trading systems and testing trading strategies

Something Interesting in Financial Video August 2013

Sergey Golubev, 2013.08.25 15:16

81. The Role of the Retail Forex Broker

Before the internet, very few individuals traded foreign exchange as they could not get access to a level of pricing that would allow them a reasonable chance to profit after transaction costs. Shortly after the internet became mainstream however several firms built online trading platforms which gave the individual trader a much higher level access to the market. The internet introduced two main features into the equation which were not present before:

1. Streaming Quotes: The Internet allowed these firms to stream quotes directly to traders and then have them execute on those quotes from their computer instead of having to deal over the phone. This automated trade processing, and therefore made it easier for firms to offer the ability to trade fx to the individuals and still be profitable.

2. Automatic Margin Calls: What is not so obvious but what was perhaps even more key is that the internet allowed an automated margin call feature to be built into the platform. This allowed firms to accept cash deposits from clients instead of having to put them through the process of signing up to trade via a credit line. As we discussed in our last lesson it is very difficult to get a credit line to trade FX and for those who do it is a lot of paperwork and hoops to jump through before they can begin trading. This would have made it impossible to offer FX trading to smaller individual traders as the cost involved in getting them set up to trade would not be worth it.

As the electronic platform allowed clients to deposit funds and then automatically cut them out of positions if they got to low on funds, this negated the need for credit lines and made the work to get an individual account open well worth it to the forex broker from a profit standpoint.

If you don't understand all the ins and outs of margin at this point don't worry as this is something that we are going to go into much more detail on in a later lesson.

For now it is simply important to understand that what these firms did was take all the traders who were not big enough by themselves to get access to good pricing and routed their order flow through one entity that was. This allowed these firms access to much tighter pricing than would otherwise have been possible which was then passed along plus a little for the brokers to the end client.

So now you can see why although the forex market has been around for a relatively long period of time, individuals have only started to trade the market over the last few years.

Anther key thing that it is important to understand here is that the larger a firm gets in terms of trading volume, the greater access that firm has to tighter prices and liquidity and the more likely that firm is to be able to pass on better pricing and execution to their clients.

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Press review

Sergey Golubev, 2013.07.01 06:59

Just something about ECN and STP - The Truth about Currenex Brokers :


What is an ECN?

ECN is a term often used when referring to Currenex. ECN stands for Electronic Communication Network and it eliminates the function of a third party in the execution of orders. Without the intercession of a third party, market participants of any size can interact directly for Bid and Offer prices posted by other market participants. This leads to greater transparency and narrower spreads. ARCHIPELAGO, purchased by the NYSE in 2006, and ISLAND are two well known ECNs.

What is an ESP?

ESP™ means Executable Streaming Prices and is offered through the Currenex system. Currenex connects to multiple sources of liquidity, primarily banks, who offer "pools of liquidity". This expansiveness from the multiple pools of liquidity, available through Currenex’s ESP, provides better price discovery and narrower spreads for traders.

The prices that are offered via Currenex are executed directly within these various pools of liquidity. Whereas in the past, a trader would be required to obtain a Prime Brokerage relationship with one or more of the major liquidity providers which required a very high threshold and associated high expenses.

Not all Currenex Brokers are the same.

It is important to remember that a broker’s Currenex offering is only as good as the liquidity sources that are linked to the platform. The quantity and quality of liquidity sources can lead to dramatic differences in price spreads. For instance, a broker offering 1-2 banks versus a broker offering 8-10 banks will have a dramatic difference in pricing and liquidity.

What is STP?

STP, or Straight Through Processing, is a term commonly used among Forex brokers.Many Forex brokers state they use "interbank pricing" but act as a counter party to their customers’ trades. They take the other side of the trade, going against the client’s best interest, and make money on a client’s losing trade.

Conversely, a true STP setup passes the order in an automated way to all liquidity sources. With a true STP broker, there is not the possibility of any adversarial relationship between the broker and client as the broker only generates revenue in the form of a commission per trade rather than the dealing desk model of capturing client losses.

Sergey Golubev  

Forum on trading, automated trading systems and testing trading strategies

Something Interesting in Financial Video October 2014

Sergey Golubev, 2014.10.17 20:03

Difference between ECN, market makers and STP brokers

In a perfect world the cost of buying and selling currencies would be the same, no matter which Forex broker you use. Unlike the stock market where we get heavy regulation and where stock prices are derived from a single exchange, prices vary from different Forex broker platforms.

The reason why is because currency prices are derived from the Interbank market which is a conglomerate of banks and hedge funds that provide prices to various Forex brokers around the world. The better the relationship between the Interbank market participants and the broker means that the prices are cheaper.

We expand on this in the video tutorial whilst also describing the main difference between ECN, market makers and STP Forex brokers.

Sergey Golubev  

Forum on trading, automated trading systems and testing trading strategies

Something Interesting in Financial Video August 2013

Sergey Golubev, 2013.08.24 08:28

80. Who Really Controls the Forex Market?

As we discussed in our last lesson the forex market is an over the counter market meaning that there is no centralized exchange where all trades are made. Because of this, the price that someone receives when trading forex has traditionally differed depending on the size of the transaction and the sophistication of the person or entity that is making that transaction.

At the center or first level of the market is something known as the Interbank market. While technically any bank is part of the Interbank market, when an FX Trader speaks of the interbank market he or she is really talking about the 10 or so largest banks that make markets in FX. These institutions make up over 75% of the over $3 Trillion dollars in FX Traded on any given day.

There are two primary factors which separate institutions with direct interbank access from everyone else which are:

1. Access to the tightest prices. We will learn more about transaction costs in later lessons however for now simply understand that for every 1 Million in currency traded those who have direct access to the Interbank market save approximately $100 per trade or more over the next level of participants.

2. Access to the best liquidity. As with any other market there is a certain amount of liquidity or amount that can be traded at any one price. If more than what is available at the current price is traded, then the price adjusts until additional liquidity enters the market. As the forex market is over the counter, liquidity is spread out among different providers, with the banks comprising the interbank market having access to the greatest amount of liquidity and then declining levels of liquidity available at different levels moving away from the Interbank market.

In contrast to individuals who make a deposit into their account to trade, institutions trading in the interbank market trade via credit lines. In order to get a credit line from a top bank to trade foreign exchange you must be a very large and very financially stable institution, as bankruptcy would mean the firm that gave you the credit line gets stuck with your trades.

The next level of participants are the hedge funds, brokerage firms, and smaller banks who are not quite large enough to have direct access to the Interbank market. As we just discussed the difference here is that the transaction costs for the trade are a bit higher and the liquidity available is a bit lower than at the Interbank level.

The next level of participants has traditionally been corporations and smaller financial institutions who do make foreign exchange trades, but not enough to warrant the better pricing

As you can see here, traditionally as the market participant got smaller and less sophisticated the transaction costs they paid to trade became larger and the liquidity that was available to them got smaller and smaller. In a lot of cases this is still true today, as anyone who has ever exchanged currencies at the airport when traveling knows.

To give you an idea of just how large a difference there is between participants in the Interbank market and an individual trading currencies for travel, Interbank market participants pay approximately $.0001 to exchange Euros for Dollars where Individuals in the airport can pay $.05 or more. This may not seem like much of a difference but think about it this way: On $10,000 that is $1 that the Interbank participant pays and $500 that the individual pays.

The landscape for the individual trader has changed drastically since the internet has gone mainstream however, in many ways leveling the playing field and putting the individual trader along side large financial institutions in terms of access to pricing and liquidity. This will be the topic of our next lesson.

Sergey Golubev  

Forum on trading, automated trading systems and testing trading strategies

Something Interesting in Financial Video August 2013

Sergey Golubev, 2013.08.26 15:50

83. How Banks, Hedge Funds, and Corporations Move Currencies

Behind central banks in terms of size and ability to move the foreign exchange market are the banks which we learned about in our previous lessons which make up the Interbank market. It is important to understand here that in addition to executing trades on behalf of their clients, the bank's traders often times try to earn additional profits by taking speculative positions in the market as well.

While most of the other players we are going to discuss in this lesson do not have the size and clout to move the market in their favor, many of these bank traders are an exception to this rule and can leverage their huge buying power and inside knowledge of client order flow to move the market in their favor. This is why you hear about quick market jumps in the foreign exchange market being attributed to the clearing out the stops in the market or protecting an option level, things which we will learn more about in later lessons.

The next level of participants is the large hedge funds who trade in the foreign exchange market for speculative purposes to try and generate alpha, or a return for their investors that is over and above the average market return. Most forex hedge funds are trend following, meaning they tend to build into longer term positions over time to try and profit from a longer term uptrend or downtrend in the market. These funds are one of the reasons that currencies often times develop nice longer term trends, something that can be of benefit to the individual position trader.

Although not the typical way that Hedge funds profit from the market, probably the most famous example of a hedge fund trading foreign exchange is the example of George Soros' Quantum fund who made a very large amount of money betting against the Bank of England.

In short, the Bank of England had tried to fix the exchange rate of the British Pound at a particular level buy buying British Pounds, even though market forces were trying to push the value of the Pound Down. Soros felt that this was a losing battle and essentially bet the entire value of his $1 Billion hedge fund that the value of the pound would decrease. The market forces which were already at play, combined with Soro's huge position against the Bank of England, caused so much selling pressure on the pound that the Bank of England had to give up trying to prop up the currency and it preceded to fall over 5% in one day. This is a gigantic move for a major currency, and a move which netted Soros' Quantum Fund over $1 Billion in profits in one day.

Next in line are multinational corporations who are forced to be participants in the forex market because of their overseas earnings which are often converted back into US Dollars or other currencies depending on where the company is headquartered. As the value of the currency in which the overseas revenue was earned can rise or fall before that conversion, the company is exposed to potential losses and/or gains in revenue which have nothing to do with their business. To remove this exchange rate uncertainty many multinational corporations will hedge this risk by taking positions in the forex market which negate any exchange rate fluctuation on their overseas revenues.

Secondly these corporations also buy other corporations overseas, something which is known as cross boarder mergers and acquisitions. As the transaction for the company being bought or sold is done in that company's home country and currency, this can drive the value of a currency up as demand is created for the currency to buy the company or down as supply is created when the company is sold.

Lastly are individuals such as you and I who participate in the forex market in three main areas.

1. As Investors Seeking Yield: Although not very popular in the United States, overseas and particularly in Japan where interest rates have been close to zero for many years, individuals will buy the currencies or other assets of a country with a higher interest rate in order to earn a higher rate of return on their money. This is also referred to as a carry trade, something that we will learn more about in later lessons.

2. As Travelers: Obviously when traveling to a country which has a different currency individual travelers must exchange their home currency for the currency of the country where they are traveling.

3. Individual speculators who actively trade currencies trying to profit from the fluctuation of one currency against another. This is as we discussed in our last lesson a relatively new phenomenon but most likely the reason why you are watching this video and therefore a growing one.

Sergey Golubev  

Forum on trading, automated trading systems and testing trading strategies

Something Interesting in Financial Video October 2013

Sergey Golubev, 2013.10.10 14:44

147. An Introduction to ECNs

This video provides an introduction to electronic communications networks (ECNs), systems that allow buyers and sellers of stocks to trade directly without an intermediary.


Most forex traders participate in the forex market with forex brokers. There are mainly two types of forex brokers: market makers and electronic communications networks (ECNs). In this article we want to introduce the latter type of brokers, the ecn forex broker.

What is an ECN forex broker?

ECN forex broker is a financial expert that provides the clients with direct access to other forex participants in the currency market by using electronic communications networks (ECNs). Unlike market makers, which always trade against their clients to make profit, an ECN forex broker only creates opportunities of trading between forex traders.

How does an ECN forex broker work?

The ECN forex brokers provide a medium by passing on the prices for different market participants such as banks, market makers and other traders in the market. Then the best bid/ask quotes will be displayed on the trading platforms based on these prices. ECN forex brokers also serve as counterparties to forex transactions, but it is a settlement that they operate on instead of pricing basis. While fixed spreads are offered by some market makers, spreads of currency pairs can be very different, determined by the trading activities of the currency pair. In active trading periods, sometimes you cannot get ECN spread at all, especially in those very liquid currency pairs such as the majors (EUR/USD, GBP/USD, USD/JPY, USD/CHF) and some currency crosses.

Pros and cons of the ECN forex broker

The ECN forex broker has both advantages and disadvantages. The pros and cons of the ECN forex broker are as follows.
The pros of the ECN forex broker can be presented in following aspects.
Traders can usually get better bid/ask prices for they are derived from multiple sources.
At certain time traders may trade on prices with no spread or with only very little spread.
Genuine ECN forex broker will pass on the orders to a bank or other trading participants on the opposite side of the transaction instead of trading against the traders.
It is very likely that the prices on the ECN forex broker are more volatile.
Traders can take on the role of market traders to other traders on the ECNs since they can offer a price between bid and ask.
The cons of the ECN forex broker can be presented in following aspects.
Many ECN forex brokers do not provide integrated charting or new feeds.
Some trading platforms are not so easy for traders to use or operate.
Since there are variable spreads between the bid and the ask prices, it may be difficult to calculate stop-loss and breakeven points in pips in advance.
Forex traders are obligated to pay commissions for each transaction.

It is obvious that there are both pros and cons of an ECN forex broker. Traders have to take many factors into consideration when choosing a forex broker.

Sergey Golubev:

More video lessons - 

  • Why Choosing a Forex Broker is so Confusing - the post 
  • Choosing a Forex Broker: Regulation and Financial Stability - the post 
  • Choosing a Forex Broker Part III: Transaction Costs - the post 
  • Choosing a Forex Broker, Part IV: Technology & Add-ons - the post 
  • Forex Broker Types - MM,NDD,STP,ECN - the post

Thanks for the very helpful comment,

But my question was about introducing a comprehensive book on broker and how they work.

soumaila adamou ismo  


I'm a trader for some time, I join this forum in order to learn again, thank you for your very useful article.


Please suggest me a good book in these areas:

  • A Book/B Book
  • Bridge 
  • Interbank / Intermarket
  • Trading managment system

and How does a broker work?

Hello Fatbody

Your question is best answered by investopedia, and if I may quote them


In the foreign exchange market, traders and speculators buy and sell various currencies based on whether they think the currency will appreciate or lose value. The foreign exchange, or forex, market is high risk and sees more than $5 trillion dollars traded daily. Traders have to go through an intermediary such as a forex broker to execute trades. No matter the gains or losses sustained by individual traders, forex brokers make money on commissions and fees, some of them hidden. Understanding how forex brokers make money can help you in choosing the right broker."

Hope that helps


Marwa from Towing Service