Forex Brokers

In the Over-the-Counter Market The role of a broker in the OTC market is to bring together a buyer and a seller in return for a fee or commission.Whereas a “dealer” acts as principal in a transaction and may take one side of a trade for his firm’s account, thus committing the firm’s capital, a “broker” is an intermediary who acts as agent for one or both parties in the transaction and, in principle, does not commit capital.

The dealer hopes to find the other side to the transaction and earn a spread by closing out the position in a subsequent trade with another party, while the broker relies on the commission received for the service provided (i.e.,bringing the buyer and seller together). Brokers do not take positions or face the risk of holding an inventory of currency balances subject to exchange rate fluctuations. In over-the-counter trading, the activity of brokers is confined to the dealers market.

Brokers, including “voice”brokers located in the United States and abroad, as well as electronic brokerage systems, handle about one quarter of all U.S. foreign exchange transactions in the OTC market. The remaining three-quarters takes the form of “direct dealing”between dealers and other institutions in the market.

The present 24 percent share of brokers is down from about 50 percent in 1980. The number of foreign exchange brokers in the United States was 9 in 1998, including voice brokers and the two major automated order-matching, or electronic brokerage systems. The number of brokers
surveyed is down from 17 in 1995.

The share of business going through brokers varies in different national markets, because of differences in market structure and tradition. Earlier surveys showed brokers’ share averages as low as 10-15 percent in some markets (Switzerland and South Africa) and as high as 45-50 percent in others (France, Netherlands, and Ireland).Many U.S.