Brokers
Foreign exchange brokers, unlike equity brokers, do not take positions for themselves; they
only service institutional banks. The role of the broker is to bring together the buyer and seller; to optimize the price – and quickly, accurately, and faithfully execute the traders’ orders.
The majority of the foreign exchange brokers execute business is via phone using an open box system — a microphone in front of the broker that continuously transmits everything he or she says on the direct phone lines to the speaker boxes in the banks. This way, all banks can hear all the deals being executed.
With the open box system, a trader is able to hear all quoted prices; whether the bid was hit or the offer taken; and the following price quote.
What the trader is not able to hear is the amount of particular bid and counter offer, or the name of the bank that is doing the trading. Prices are anonymous. The anonymity of the banks that are trading in the market ensures the market’s efficiency, ensuring that all banks have a fair chance to trade.
Sometimes brokers charge a commission that is paid equally by the buyer and the seller. The fees are negotiated on an individual basis by the bank and the brokerage firm.
Brokers show their customers the “bid” and “offer” prices made by other customers. There is either a two-way (bid and offer) or a one way (bid or offer).
Traders show different prices because they “read” the market differently; they have different expectations and different interests. A broker who has more than one price on one or both sides will automatically optimize the price. In other words, the broker will always show the highest bid and the lowest offer. The FX market through this process has access to an optimal spread.
Fundamental and technical analyses are used for forecasting the future direction of the currency. A trader might test the market by hitting a bid for a small amount to see if there is any reaction.
Another advantage of the brokers’ market is that brokers might provide a broader selection of banks to their customers. Some European and Asian banks have overnight desks so their orders are usually placed with brokers who can deal with the American banks, adding to the liquidity of the market.
