Broker types and regulation: market maker, STP, ECN

The broker is the intermediary between you and the market. It holds your money, executes your orders and sets part of your costs. Choosing a broker is therefore as important a decision as choosing a strategy. Two questions matter above all: how it makes money and who supervises it.

The market maker

A market maker acts as the counterparty to your orders. When you buy EUR/USD, it is the one selling to you. It shows its own prices, built from interbank market quotes, and earns mainly from the spread.

This model has real advantages: often fixed or stable spreads, instant execution, small sizes accepted. It also creates a potential conflict of interest: on positions it does not hedge, the broker wins when the client loses. A regulated market maker must manage that conflict, execute at the best price reasonably available and not manipulate its quotes.

STP and ECN brokers

An STP broker (straight through processing) passes your orders directly to one or more liquidity providers: banks, trading firms or other brokers. It does not take the other side of your trade and earns by adding a small mark-up to the spread it receives.

An ECN broker (electronic communication network) goes further: it gives you access to a network where prices from many participants meet. The spreads shown are raw market spreads, sometimes close to zero on EUR/USD, and the broker charges a commission per lot, for example $7 per lot round trip.

The main regulators

A serious broker is authorised by a financial regulator. The regulator checks its capital, the segregation of client money, the quality of information given to clients and compliance with leverage rules. In the European Union, the MiFID II directive harmonises these rules and ESMA coordinates the national regulators.

Thanks to the European passport, a broker authorised in one EU country, Cyprus for example, can offer its services across the Union after a simple notification. It is then mainly supervised by its home regulator. Since Brexit, that passport no longer works between the EU and the UK: a broker serving UK clients needs FCA authorisation.

Checking a broker in the registers

Never trust a regulator's logo displayed on a website. Go to the official register yourself and check that the company's exact name, licence number, address and domain name all match.

1. For a UK broker, use the FCA's Financial Services Register, and check the FCA Warning List for unauthorised firms.
2. For a US broker, look up the firm in the NFA's BASIC database to confirm its CFTC registration and NFA membership.
3. For an Australian broker, check its AFS licence in ASIC's professional registers.
4. Check the exact entity you are signing up with: the legal name in the terms and conditions and on the client agreement.
5. Beware of clone firms that copy the name and number of an authorised broker with a different website and contact details.

Client money and compensation schemes

At a broker regulated in the UK, the EU or Australia, your money must be held in segregated accounts, separate from the company's own funds. If the broker goes bust, that money is not used to pay its creditors. Retail clients also benefit from negative balance protection: you cannot lose more than you deposited.

As a last resort, a compensation scheme pays clients back if their money has nonetheless gone missing. Amounts vary by country: up to £85,000 per person with the FSCS in the UK, €20,000 with the ICF in Cyprus, and up to $500,000 including $250,000 in cash with SIPC in the US, which covers securities accounts but not futures or forex accounts. Australia relies mainly on strict client money rules rather than a general compensation fund for brokers. These schemes cover a broker's failure, never trading losses.

• Red flag: an adviser who calls you out of the blue and pushes you to deposit more.
• Red flag: withdrawals refused, delayed or hit with unexpected fees.
• Red flag: a promise of guaranteed returns, or handing your account over to a stranger to manage.
• Good sign: a clearly identified entity, a licence you can verify and costs published in detail.

To compare regulated brokers on their costs, platforms and reviews from real clients, you can use an independent comparison tool. Always take the time to cross-check with the official registers before opening an account.