Automated Order Matching

Electronic Broking Systems

Until 1992, all brokered business in the U.S. OTC market was handled by voice brokers. But during the past few years, electronic broker systems (or automated order matching systems) have gained a significant share of the market for spot transactions.



The two electronic broking systems currently operating in the United States are Electronic Brokerage Systems, or EBS, and Reuters 2000-2. In the 1998 survey, electronic broking accounted for 13 percent of total market volume in the United States,more than double
its market share three years earlier. In the brokers market, 57 percent of turnover is now conducted through order-matching systems, compared with 18 percent in 1995.

With these electronic systems, traders can see on their screens the bid and offer rates that are being quoted by potential counter parties acceptable to that trader’s institution (as well as quotes available in the market more broadly), match an order, and make the deal electronically,with back offices receiving proper notification.
The electronic broking systems are regarded as fast and reliable. Like a voice broker, they offer a degree of anonymity.

The counter party is not known until the deal is struck, and then only to the other counter party. Also, the systems can automatically manage credit lines. A trader puts in a credit limit for each counter party that he is willing to deal with, and when the limit is reached, the system automatically disallows further trades. The fees charged for this computerized service are regarded as competitive.

The automated systems are already widely used for certain standardized operations in the spot market, particularly for smaller-sized transactions in the most widely traded currency pairs.Many market observers expect these electronic broking or order matching systems to expand their activities much further and to develop systems to cover additional products, to the competitive disadvantage, in particular, of the voice brokers. Some observers believe that automated systems and other technological advances have substantially slowed the growth in market turnover by reducing “daisy chaining” and the “recycling” of transactions through the markets, as well as by other means.