Brokers and prop firms

These two get confused constantly, including by people who should know better. They do different things.

What a broker does

A broker gives you access to a market. You deposit your money, they provide a platform, they execute your orders, and they hold your funds.

How brokers make money:

• The spread, commission, or both
• Swap charges on overnight positions
• In some models, from client losses, because the broker is the counterparty to the trade

Broker models you will encounter:

• Market maker, or dealing desk. The broker takes the other side of your trade internally. Your loss can be their gain, which is a conflict of interest, although most large firms hedge their net exposure rather than betting against individual clients.
• STP or ECN. Orders are passed through to liquidity providers or an exchange. The broker earns from commission and markup rather than from your outcome.

Regulation

A regulated broker is subject to capital requirements, client money segregation rules, reporting obligations, and a complaints process you can actually use.

Major regulators include ASIC in Australia, the FCA in the UK, CySEC in Cyprus, and the CFTC and NFA in the United States. Offshore registrations in jurisdictions with minimal oversight offer higher leverage and fewer protections, and that is the trade being made.

Check the regulator's own register rather than the claim on the broker's website.

What a prop firm does

A prop firm does not hold your trading capital the way a broker does. You pay a fee to attempt an evaluation, and if you pass, you trade a simulated account the firm provides under rules the firm sets.

Distinctions that matter:

• You are not their client in the way a broker's customer is
• The balance you see is not money you can withdraw
• The relationship is governed by a contract you agree to, not by financial services regulation in most jurisdictions
• The firm can change rules, suspend accounts, or close, with far less recourse available to you than a regulated broker provides

The account is simulated

This is the part most beginners misunderstand. Both the evaluation account and the funded account that follows it are almost always demo accounts running on simulated funds.

Most prop firms route execution through a real broker's infrastructure, which is why the platform, the price feed and the order types all behave like a live account. The trades themselves usually go nowhere. There is no capital of yours in the market and often none of the firm's either.

The payouts are real

What you earn on a funded account is paid to you in actual money, on the schedule and profit split set out in your agreement.

So the balance on the screen is a scorekeeping number rather than a bank balance. You cannot withdraw the balance itself. You request a payout of your agreed share of the profit the account recorded, and the firm pays it from its own funds.

Whether a firm places your trades in the market or simply tracks them changes nothing about your obligations. The rules, the drawdown limits and the payout terms are the same either way.

The practical difference

What to check before depositing anywhere

For a broker:

• Regulator and licence number, verified on the regulator's register
• Total cost, meaning spread and commission together, on the instruments you trade
• Withdrawal process and timeframes

For a prop firm:

• Written rules, read in full, including the ones about consistency and news
• Documented payout history, from sources other than the firm's own marketing
• How long they have operated
• What happens to your account if the firm's broker relationship changes

Guide 04 goes through prop firm terms properly, including the clauses that cause most disputes.