What is a broker and what is it for?

Brokers are tools that allow active trading on financial markets, and they are also the people who execute those orders.

In one way or another, brokers have been with us for more than half a millennium. Although they are now known as trading platforms which can be used at different levels, from beginner through to programming with complex APIs for algorithmic trading, brokers were originally founded in France with the buying and selling of wine. But what is a broker as we know it today?

And, almost as important: what role do they play in the digitization and automation of trading? In this article we will look at the difference between broker and trader, how APIs will affect trading and why it is worth automating these trades in the Forex market.

What is a broker and why does it refer to a person?

The term broker dates back more than seven centuries, and derives from the French broceur meaning wine retailer. In the thirteenth century broceurs bought wine barrels, which they pierced and served in individual glasses. At least this is as far back as the etymology reaches.

Broceurs bought wine at a lower price than they sold it, and by the time the stock market was born, a term was needed for this principle. And so brokers arrived on the scene (note the -er suffix indicating a ‘person doing something’, or a profession.

On the pioneering English markets, the term broker caught on quickly because of its similarity to break and for several centuries the hispanicized term broker came to mean “financial or trade intermediaries who receive a fee for their services”, according to the definition in the RAE (Spanish Royal Academy).

Although the figure of broker still exists, and they continue to buy and sell capital on behalf of investors, the democratization of technology and the active participation of investors has changed the meaning of the term, complicating it remarkably.

These days, broker is a term that defines both professional brokers and amateur investors, as well as the platform that they use to buy and sell shares, or indeed any financial or non-financial asset. For example BBVA Bolsa Broker is a platform that allows you to manage investments on-line.

What is the current difference between ‘broker’ and ‘trader’?

Traders usually refer to trained individuals who trade on the stock market using technical analysis. Traders initially differed from brokers when individuals could trade their assets personally, without the need for an intermediary.

At the same time, within the professional financial world both terms began to refer to strategists (traders) and executors (brokers) with very specific roles: traders became market analysts who sold their information or shared it with brokers in exchange for a fee. A good broker-trader relationship was the key to success.

Professionally speaking, in large firms brokers became the intermediary between the trader and the market, although often both terms were combined in the same person in small investment companies. It is not surprising that they began to be used synonymously at the end of the last century, especially with the birth of some digital platforms. In other cases, large differences still persist between the two.

For example, while BBVA Trader is a high- or very high-risk order execution platform, BBVA Broker is recommended for more inexperienced users. In this case, the difference between the labels broker and trader lies in the complexity of the platform’s products. With the advent of digital platforms, it is also common for the trader to be the person operating the broker platforms.

What is the relationship between broker or trading and foreign currencies?

The foreign exchange market (Forex) is one of the possible targets of trading analysis and of brokers, as with any fluctuating market that allows buying and selling at a large profit. Often, different funds operated by brokers trade on the Forex market as part of their investment strategy, and use systems that automate buying and selling and currency exchanges.

BBVA Trader, the high-risk order execution platform, includes the Forex market as a submarket and the main currency pairs as preferential information. Users of this tool can enter the Forex through it, although users of other financial tools can also trade on it in another way using the FX API.

The FX API is an API by BBVA API_Market that allows spot and forward currency trades and can be integrated into an internal management system. For SMEs, this means being able to automate foreign exchange trading in their collections and payments. For traders and brokers, it means being able to program part of their activity to gain bigger profits.

FX API and automated foreign exchange trading

Due to the deregulation of the Forex market and the characteristics of this market, until recently customers had to make requests by phoning the trading floor of banks. They picked up the phone and asked to convert a specific amount of currency into a different currency, specifying the type of trade (spot, futures contracts or futures market).

However, apps like FX API, which connects directly with a 24×5 service and operates in 30 different currencies, allows automated trading and fully personalized strategies. For example, it allows companies to automate FX rates into their ERP, being able to choose under what circumstances they should be converted. They also allow traders to design their investment strategies.

How will the world of APIs affect brokers?

Brokers, in the sense of investment platforms such as BBVA Bolsa Broker, are already starting to use API tools to connect different services. APIs translate information and are able to take it from one place to another while keeping the message coherent.

This will allow a broker tool to be integrated within a same panel with other different brokers, or integrate APIs from different markets and customers within a broker. These ad hoc structures, which are already viable for the big market players, will soon be democratized, giving end users more powers.