What is a Forex Broker?
If you want to trade in the forex markets, you need a broker. But what exactly is a broker? To understand this, consider the following:
Let’s say you want to buy an apple, so you go to a street market. The apple is what you want to buy – the street market is the place where you can do this, because that is where people are selling apples.
Similarly, imagine you are now selling apples and need to find customers; you can go to the street market because that is where your customers are – that is where there are people buying apples.
The street market is a place where buyers and sellers meet. However, when you go to a street market, you do not generally see many people selling apples to each other; they will be sold through a stall.
In the forex markets, this is no different. You have buyers and sellers of different currencies – they need a place to come together and there needs to be a facility to actually buy and sell those currencies.
In the forex markets, however, the buyers and sellers can be thousands of miles apart. In order to find each other, there must be a mechanism that matches their interests: this is where the broker comes in.
The forex broker's role
A broker is a place where buyers and sellers go to buy and sell instruments, such as currencies.
The forex broker operates as a middleman between you and the market. In other words, in order to find a buyer or a seller of currencies, you can go to a broker and they match you up with either a respective seller or a respective buyer.
However, instead of just being the middleman between you and another buyer or seller, they are also the middlemen between you and what is called a “liquidity provider”.
To explain liquidity provider, we will start with the basic idea of liquidity. Let’s say you want to exchange currency – in other words, buy a certain amount of a particular currency.
In order for you to buy that currency, there must be someone to sell that currency to you. In order to sell the currency, there must be someone willing to buy that currency off of you.
If there are many people that want to buy the currency that you are selling, then it is likely that you will be able to sell. If there are many people selling the currency that you wish to buy, then it is likely that you are going to be able to buy the currency that you want. When there is an abundance of buyers and sellers in the market, it is said that the market is “liquid”.
There is another way in which a market can be liquid. Let’s say that you would like to buy currency, but instead of there being many individuals selling small quantities of currency, there are fewer sellers that are selling larger amounts of currency. The market is still liquid. These sellers that are selling huge amounts are called liquidity providers because they are actually providing liquidity in the markets – large banks or financial institutions that trade currencies on a large scale.
In other words, they are trading such vast quantities of currency that when you sell, you are likely to be selling to a liquidity provider and when you buy, you are likely to be buying from a liquidity provider. They are trading so much money that there is always a party to trade with.
When it is said that a broker will pass your trade on to a liquidity provider, what this means is that the broker will match your contract up with a liquidity provider, such as a bank or another financial institution, to take the other side of your trade.
How do I interact with a forex broker? What do I do to trade?
The broker in its original sense could be thought of someone that you phoned in order to buy or sell currencies. The development of the Internet and software now allows you to interact with a broker through what is called a trading platform or trading software.
The trading platform
A trading platform is a piece of software and it is through this software that you actually buy and sell different currencies. Trading platforms are software downloaded from the Internet and installed onto your computer. This is what you use to trade forex.
However, there are forex brokers that actually enable you to trade through a web browser, which can be beneficial as it allows you to trade from any computer without having to download software.