Foreign Exchange Brokerage

Voice broker firms have branches or affiliations with brokers in other countries. It is common for a deal to be brokered between a bank in the United States and one in London or elsewhere during the period of the day when both markets are active.

In the OTC market, the extent to which brokering, rather than direct dealing, is used varies, depending on market conditions, the currency and type of transaction being undertaken, and a host of other factors. Size is one factor the average transaction is larger in the voice brokers market than in the market as a whole.

Using a broker can save time and effort, providing quick access to information and a large number of institutions’ quotes, though at the cost of a fee. Operating through a broker can provide at least a degree of confidentiality,when a trader wants to pursue a particular strategy without his name being seen very widely around the market in general (counter parties to each transaction arranged by a broker will, of course, be informed, but after the fact).

The brokers market provides access to a wide selection of banks, which means greater liquidity. In addition, a market maker may wish to show only one side of the price—that is, indicate a price at which the market maker is willing to buy, or a price at which the market maker is willing to sell, but not both—which can be done in the brokers market, but generally not in direct dealing. Of course, a trader will prefer to avoid paying a broker’s fee if possible,but doesn’t want
to miss a deal just to avoid a fee.

Foreign exchange brokerage is a highly competitive field and the brokers must provide service of high quality in order to make a profit. Although some tend to specialize in particular currencies, they are all rivals for the same business in the inter-dealer market.Not only do brokers compete among themselves for broker business—voice brokers against each other, against voice brokers located abroad, and against electronic broking systems—but the broker community as a whole competes against banks and other dealer institutions that have the option of dealing directly with each other, both in their local markets and abroad, and avoiding the brokers and the brokers’ fees.