A broker is an institution that acts as a middle-man by placing orders on the market on behalf of their investor clients. Some brokers also offer additional services related to their central services as a financial intermediary. Brokers charge fees and commissions for their services.
Brokers are both self-regulated by an industry body and by the Financial Industry Regulatory Authority (FINRA).
Modern brokers, or brokerage houses, are now numerous and varied, representing many different types of investors. This situation is contrasted with historical brokers who exclusively serviced other institutions and wealthy individual investors.
At the top of the broker industry are the large international banks and a few major national banks. These banks offer brokerage services to institutions, such as hedge funds and pension funds, as well as wealthy private investors. Their intermediary services also come with a variety of additional support services, such as market research and order placement advice.
Under these major brokers are a range of mid-sized brokers that aim their services at individual investors and smaller institutions. These brokers will have lower fees, offer less and lower quality additional services and will generally offer more limited access to the markets, both in terms of order sizes and range of products.
At the bottom of the pyramid are discount brokers, who offer bare-bones access to the markets for low fees and commissions. These brokers tend to offer little or no additional services, and the market access tends to be more limited.
Brokers and Trading Platforms
One of the defining features of a broker in the contemporary markets is their trading platform. These platforms are the mechanism through which their investor clients are able to place orders for the broker to execute.
Brokers with high quality platforms are generally able to charge higher fee and commission rates, as investors are willing to pay a premium for smooth and intuitive platforms that offer a wide range of tools and services.
On the other hand, some discount brokers offer extremely simple trading platforms that appeal to less experienced investors, and they are able to market their lower quality platforms as an advantage in terms of quick, effective and intuitive order execution.
The trading platforms are almost always equipt with interactive charting. Sometimes the broker’s charting isn’t the best so you may have to use an alternative charting software such as eSignal.
Brokers and Regulation
Since brokers are entrusted with the funds of their clients and the duty to act in their clients’ best interests, they are overseen by both a self-regulating industry body and the Financial Industry Regulatory Authority (FINRA).
Most of the regulatory issues involving brokers tend to center on the promotion of certain products to investors, many of which the brokers receive a commission for selling from the product’s creator or owner. This can lead to incentive problems, and all brokers are expected to be able to justify any products that they promote to clients as beneficial to those clients.
Brokers and Trading
The choice of broker, or brokers, is a very important one that every trader and investor must make, and it will depend on your personal trading style, experience, knowledge and preferences.
For example, some day traders only require quick and effective access for buying and selling national equities, for which discount brokers are ideal. The simple platforms, low fees and lack of unnecessary services are a perfect match for these day traders, particularly if they execute a high number of small trades, which can be very expensive with high fee brokers.
On the other hand, some day traders rely on a large amount of data and tools, as well as access to more obscure or exotic markets, all of which some discount brokers fail to offer.
All traders should take the time to research one or more brokers before they start trading. In addition, traders should be prepared to switch brokers as their trading needs change, since the perfect brokerage services are essential to optimal trading performance.
Brokers are key financial intermediaries in the contemporary financial landscape.
Many traders give little thought to the brokers that they trade with, despite the fact that the right broker services are essential for maximizing your trading returns, as well as minimizing your stress, frustration or anxiety.
All traders should take the time to find the perfect broker for their needs, and not hesitate to change brokers as their trading needs change.