Futures, CFDs and spread bets are high risk; most retail traders lose money. Education only, not advice. Risk warning

Good Trading Guide

What a Broker Does and How Brokers Make Money

Module 2: Brokers, Accounts and Platforms (UK) · Lesson 1 of 11 · Back to course

To trade spread bets or CFDs in the UK, you need an account with a broker (often called a “provider”). The broker gives you prices, takes your orders, holds your money and works out your profit or loss. It’s a business, so it charges you for that – sometimes in ways that aren’t obvious. Understanding how it earns money is the first step to keeping your own costs down.

What a broker actually does

  • Quotes prices – a buy (ask) and a sell (bid) price for each market.
  • Executes your orders – fills them at a price, either by taking the other side itself or by passing them on.
  • Holds your money – UK firms must keep retail client money separate from their own (see Lesson 2.4).
  • Manages margin – tracks how much of your money is tied up in open trades and closes positions if your account runs too low.
  • Provides the platform – charts, order tickets, statements and apps.
  • Carries out checks – identity checks, and an appropriateness test before you can trade complex products.

The ways brokers earn money

Charge What it is When you pay
Spread The gap between the buy and sell price Every trade, as soon as you open it
Commission A separate fee per trade, usually on share CFDs or “raw spread” accounts When you open and/or close
Overnight financing Interest charged (or occasionally paid) for holding a leveraged position overnight Each night a daily position stays open
Currency conversion A fee for converting profits or losses from another currency into pounds When a trade on a non-GBP market closes
Guaranteed stop premium An extra charge for a guaranteed stop Usually only if the stop is triggered
Other fees Inactivity fees, market data fees, some withdrawal fees Varies – check the provider’s charges page

“Commission-free” doesn’t mean free. It usually means the cost is built into the spread instead.

Two broad business models

Brokers handle your trades in two broad ways, and many use a mix of both:

1. Taking the other side (market making / “dealing desk”). The broker is your counterparty. If you buy, it sells to you. It may then hedge some of its overall exposure in the wider market, or simply hold the risk across many clients who are buying and selling. It earns the spread, and it can also gain when clients lose.

2. Passing orders on (agency / “STP” / direct market access). The broker sends your order to banks, exchanges or other liquidity providers. It usually earns a commission or a small mark-up on the spread, so its income depends mainly on how much you trade.

Both models are legal, and both are used by FCA-authorised firms. UK firms must identify and manage conflicts of interest and take sufficient steps to get the best possible result when executing client orders. As a customer, the practical questions are simple:

  • What’s the total cost of the kind of trading I’ll actually do?
  • Are orders filled reliably, including around news?
  • Is the firm FCA authorised, and does it treat clients fairly?

Example: what does a year of trading cost? (illustrative numbers)

All figures are made up for teaching purposes. They aren’t any provider’s real charges.

A beginner spread bets the UK 100 (FTSE 100) at £2 per point. The spread is 1 point during UK hours.

  • Spread cost per trade: 1 × £2 = £2.
  • They trade 4 times a day, 5 days a week, for 48 weeks: 960 trades.
  • Spread cost for the year: 960 × £2 = £1,920.

Now suppose they sometimes hold trades overnight. A broker might charge an overnight rate made up of a benchmark interest rate plus its own fee – say 4% + 2.5% = 6.5% a year – on the full value of the position.

  • Position value: 8,000 points × £2 = £16,000.
  • One night’s financing: £16,000 × 6.5% ÷ 365 ≈ £2.85.
  • Holding that position for 30 nights: about £85.

If their account is £3,000, the spread alone over the year is 64% of their account. That’s before a single losing trade. Costs like these are one of the main reasons frequent traders find it so hard to come out ahead – it’s also why the course keeps saying fewer, better trades usually beat more trades.

How to check a broker’s costs

  1. Find the provider’s charges or costs and charges page, and its key information documents (KIDs).
  2. Look up the typical spread on the markets and times you’ll trade, not just the “from” figure.
  3. Check the overnight financing formula and the admin fee on top of the benchmark rate.
  4. Check currency conversion fees if you’ll trade US or European markets.
  5. Check for inactivity fees and any withdrawal charges.
  6. Compare on a demo account: note the actual spread at your trading times for a week.

Common mistakes

  • Comparing headline “from” spreads. The spread you get at 21:00 or around news can be much wider.
  • Ignoring overnight financing. It’s small per night but adds up on positions held for weeks.
  • Trading more because it’s “commission-free”. Every trade still costs the spread.
  • Picking a broker for a bonus or gift. UK rules ban firms from offering retail CFD clients monetary or non-monetary trading bonuses – an offer like that from a firm claiming to serve UK clients is a red flag.

The prop firm angle

Prop firm challenges have costs too. Most charge commissions or spreads inside the simulated account, and those come off your results just like at a broker. A strategy that only just breaks even before costs will usually lose once spreads and commissions are counted – and that can be the difference between passing and failing.

Key takeaways

  • A broker quotes prices, executes orders, holds your money and manages margin.
  • Brokers earn from spreads, commissions, overnight financing and other fees.
  • Some take the other side of your trades; some pass them on; many do both.
  • The total cost of how you trade matters far more than any headline spread.

Quick quiz

  1. Name three ways a broker can make money from you. (Any three of: spread, commission, overnight financing, currency conversion, guaranteed stop premium, inactivity fees.)
  2. What does “commission-free” usually mean? (The cost is built into the spread.)
  3. You trade at £3 per point with a 2-point spread. What does each trade cost? (£6.)
  4. Why might frequent trading be hard to profit from? (Costs build up with every trade, so you need a bigger edge to cover them.)
  5. Are UK retail CFD clients allowed to receive trading bonuses? (No – FCA rules ban monetary and non-monetary trading benefits for retail CFD clients.)

Key terms

Broker · Market maker · Spread · Commission · Overnight financing · Swap · Guaranteed stop · Slippage

Try this

Take your last 20 demo trades (or plan 20 imaginary ones). For each, write down the spread at the time you’d trade and your stake. Add up the total spread cost. Then work out what percentage of your demo balance that is. Repeat the exercise for a full year at your current trading pace. Most beginners are surprised.

FAQ

Do brokers want me to lose? It depends on the model, and many firms hedge their exposure. What’s true in every model is that the broker earns money from costs whether you win or lose, so keeping costs low is in your hands.

Is a market maker broker a scam? No. Market making is a normal, legal business model used by many FCA-authorised firms. What matters is that the firm is authorised, clear about its costs and treats clients fairly.

Which broker has the lowest costs? We don’t recommend providers in our lessons. Use the steps above to compare the costs of the kind of trading you’ll actually do.

← 1A.4 Four ways to analyse a market
2.2 How to check a firm is FCA authorised →

Disclaimer: This page is general education, not financial or investment advice or a personal recommendation, and it doesn’t take your circumstances into account. Examples are hypothetical, for illustration only, and not an invitation to buy or sell. Learning a strategy doesn’t guarantee profits. Past performance is not a reliable guide to future results. Futures, spread bets and CFDs are complex and carry a high risk of losing money quickly because of leverage, and most retail traders lose money. With a real futures account, losses can exceed your deposit. Only trade with money you can afford to lose, and speak to an independent FCA-authorised adviser if you’re unsure. Read our full risk warning.