What is an Inter-Dealer Broker (IDB)?
An Inter-Dealer Broker (IDB) is a specialized broker financial intermediary which facilitates transactions between investment banks, brokers, and other major financial institutions. IDBs work with large blocks of securities when trading volume is low or when clients seek anonymity on their orders.
The inter-dealer broker often focuses on transactions where there is no formal exchange or market maker system, although they may also commonly act as an agent for large cross trades on scholarships. As such, IDBs also operate in OTC trading (OTC), serving municipal, government, corporate and other bonds.
Key points to remember
- Inter-dealer brokers (IDBs) facilitate and execute transactions on behalf of institutional clients in the listed and over-the-counter financial markets.
- IDBs are driven by higher commissions and spreads than for traditional securities or when dealing with retail clients.
- In times of market stress, BIDs help create creative trades to help smooth the markets.
Understanding Inter-Dealer Brokers
IDBs assist, assemble and execute transactions for institutional clients, which is why they are “inter-dealer” brokers. Most of the IDB’s business is agency business, which means that trade ideas and orders come from their clients, which may be dealing desks at investment banks, hedge funds, or trading companies. ‘insurance. Some BIDs will commit capital on certain orders, temporarily taking the risk of a position in order to fill a client. They would then seek to offload that position to other customers or to the market as a whole.
As over-the-counter markets are, by definition, decentralized, liquidity and transparency are limited. Inter-dealer brokers play a crucial role, providing information on prices, liquidity and confidentiality of their trading actions. In a way, they are each mini exchanges where other financial institutions can find offers and offers for their activities. However, since IDBs buy from one dealer to resell to another, they act similarly to market makers.
IDBs play a vital role in connecting buyers and sellers of lesser-known fixed income products. In this field where some products become too specialized to attract a large number of market participants, the connection of a willing buyer and a motivated seller is important to allow a transaction to occur, thus creating discovery. prices for securities with low liquidity.
Another function provided by IDBs is to smooth the market in times of stress. Sometimes the BDIs, with the exception of municipal bond IDBs are often the only players willing to buy securities that appear to be undervalued and take the risk that the market will return to a more stable level. If they are correct, they will make a profit on the bonds in addition to the commissions earned by buying and selling to the dealer banks. This is essential to maintain liquidity during extreme periods.
Advantages of the inter-dealer broker
Inter-dealer brokers add value to traders at financial institutions in several ways. IDBs improve price discovery and transparency by publishing a offer, to offer, and the size of securities available for trading. This listing facilitates the circulation of information and ensures the liquidity and efficiency of the market in a space where there are not many players.
Dealers benefit from anonymity and confidentiality while working in the inter-dealer broker system. Traders can also benefit from reduced trading costs. Inter-dealer brokers operate on small spreadsbut they manage large transactions.
As in most areas of financial transactions and record keeping, inter-dealer brokers are adapting to the changing electronic landscape. Previously, employees spent their days on the phone, to the point that they were called “voice brokers”. After hours, a lot of effort has gone into growing and maintaining their customer base with travel and entertainment. Competition for business was fierce.
Today, an increasing number of trades are conducted electronically, and buyers and sellers are matched on IDB systems. These platforms allow traders trade directly with each other, although the identity of each party remains hidden. However, business marketing after hours is still necessary to satisfy customers.