WMBA chief executive Alex McDonald exlpores the role of interdealer brokers in today's markets.
The role of the over-the-counter (OTC) marketplace in the
generation of wholesale financial market products used widely
in both developed and emerging economies is undisputed. Most,
if not all, traded financial products have their genesis in OTC
markets and then migrate to exchanges if they can become
standardised and liquid enough to trade. In particular, OTC
markets are essential to the real economy, as governments,
corporates and pension funds all use OTC products to hedge
their risks and to obtain the financial products necessary to
achieve their investment and financial targets.
As independent agents, interdealer brokers (IDBs) are an
intrinsic and instrumental part of the OTC markets. They
facilitate access to OTC and exchange traded pools of liquidity
across a full range of asset classes and their associated
derivatives and they are also non-partisan transporters of
price information which ensure confidentiality between the
contracting parties and enhance liquidity, resulting in
improved prices for market participants.
In this process, IDBs publish the best bid and offer available
to the markets in an effort to improve price discovery with the
ultimate goal of bringing buyers and sellers together at one
price. During price discovery, dealer interaction with IDBs
masks their identity from the market place which reduces the
market impact costs, associated with the value to the market,
of the knowledge that a particular dealer is seeking to buy or
Neutral information on OTC volumes and independent price marks
are used by regulators, central banks, investment banks and
other financial and non-financial institutions to accurately
evaluate risk, mark to market, increase fiscal transparency and
improve the audit process.
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