Mechanics of Trading Through Brokers

Voice Brokers and Electronic Brokering System The traditional role of a broker is to act as a go between in foreign exchange deals, both within countries and across borders.Until the 1990s, all brokering in the OTC foreign exchange market was handled by what are now called live or voice brokers.

Communications with voice brokers are almost entirely via dedicated telephone lines between brokers and client banks. The broker’s activity in a particular currency is usually broadcast over open speakers in the client banks, so that everyone can hear the rates being quoted and the prices being agreed to, although not specific amounts or the names of the parties involved.

A live broker will maintain close contact with many banks, and keep well informed about the prices individual institutions will quote, as well as the depth of the market, the latest rates where business was done, and other matters. When a customer calls, the broker will give the best price available (highest bid if the customer wants to sell and lowest offer if he wants to buy) among the quotes on both sides that he or she has been given by a broad selection of other client banks.

In direct dealing, when a trader calls a market maker, the market maker quotes a twoway price and the trader accepts the bid or accepts the offer or passes. In the voice brokers market, the dealers have additional alternatives.

Thus,with a broker, a market maker can make a quote for only one side of the market rather than for both sides.Also, a trader who is asking to see a quote may have the choice, not only to hit the bid or to take (or lift) the offer, but also to join either the bid or the offer in the brokers market, or to improve either the bid or the offer then being quoted in the brokers market.