Brokers & Accounts · Beginner · 5 min

Broker types: banks, online brokers, neo-brokers, market-maker brokers

You can describe the main types of brokers, how each one earns money, and whether it sends your order to a market or takes the other side itself.

Same button, different wiring

Your house bank, an online broker, a trading app and a CFD platform all let you buy and sell with one tap. On the screen they look almost the same.

Behind the button they work very differently: how much they charge, which markets you can reach, and, most important, where your order goes. This lesson sorts the main types of brokers, without naming or ranking any of them.

Four kinds of broker

Banks. Many banks offer a securities account next to your current account. It is convenient and everything is in one place. Fees are usually higher, and the range of markets can be limited.
Online brokers. They work through a website and an app, with lower fees than most banks and often access to many exchanges and products.
Neo-brokers. App-only brokers with very low or zero commissions. To keep costs down, many offer fewer products and route orders to only one or a few trading venues. Their income often comes from spreads, currency conversion fees, interest on customers' cash and paid plans.
Market-maker brokers. Common for forex and CFDs. They quote their own buy and sell prices and take the other side of your trade, which is why they are also called dealing desk brokers. Some pass trades on to banks and other liquidity providers instead.

The type matters most at one point: where your order goes.

A broker acting as an agent sends your order to an exchange or another venue. A market-maker broker is your counterparty. As you saw earlier in the course, the SEC notes that forex dealers trade for their own account and may not offer the best price available. That does not make it a scam, but it is a conflict of interest you need to know about.

In the EU, MiFID II requires investment firms to take all sufficient steps to get the best possible result when executing your orders. This is called best execution, and it covers price, costs, speed and the likelihood that the order is filled.

Free isn't zero

A fictional trader buys a US share for 1,000 in euros, at three types of broker:

Bank: commission about 10, no extra currency fee shown.
Online broker: commission 1, currency conversion fee 0.1%, so 1.
App: no commission, but a currency conversion fee of 0.5%, so 5.

The app is cheapest on the commission line and still not the cheapest overall. At this size the online broker costs 2, the app 5 and the bank 10. For a trade of 10,000, the order can change: the app's percentage fee grows to 50, while a fixed commission stays the same. Real price lists have more lines than this, and the next lesson walks through them.

Common mistakes

Choosing by commission alone. Spreads and currency fees can cost more than the commission saved.
Not asking where orders go. A broker that takes the other side has different incentives than one that routes to a market.
Assuming all brokers offer the same protection. That depends on the regulator and the legal entity, covered later in this rubric.
Picking by app design. A beautiful app says nothing about costs or safety.
Ignoring the product range. A broker without the markets or order types you need will push you into compromises later.

The takeaway

Brokers differ in price, products and service. The key question: does your broker pass your order to a market, or trade against you itself?

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the step that decides who is on the other side of your trade.

Tap the chart.

A broker either routes your order to a market or acts as the counterparty itself. That changes who profits when you lose.
2A forex or CFD provider quotes its own prices and takes the other side of your trades. What is it called?

A market-maker broker, sometimes called a dealing desk, is your counterparty. Your loss can be its gain.
3A neo-broker charges no or very low commissions. Where else can its income come from?

Low commissions do not mean no costs. Check the full price list, including spreads and currency fees.
4What does best execution under EU rules require?

MiFID II requires firms to take all sufficient steps for the best possible result, looking at price, costs, speed and likelihood of execution.

of 4 correct.