What Is Blind Brokering?
Blind brokering is the case when brokerage firms ensure anonymity to both the buyer and the seller in a transaction. In the ordinary course of securities trading, most brokerage transactions are "blind."
Blind brokering helps prevent unfair advantages among traders or implicit disclosures of trading positions and strategies. Exceptions may occur or even be legally required for broker-dealers or others acting as both broker (agent) and principal on a given trade.
- Blind brokering is the practice of maintaining anonymity for both buyer and seller by using a third-party broker acting as an intermediary.
- Blind brokering helps ensure fairness in the market.
- Broker-dealers selling securities to their own customers are exceptions to the normal blind brokering.
Understanding Blind Brokering
Brokers are in the business of effecting trades by matching buyers and sellers of security and executing that trade in the market. One of the benefits of markets is that anonymous strangers are able to engage with each other with trust that the trade will go through without a hitch, even though the other side of the trade is unknown. Brokers play a key role in this process. By preserving the anonymity of both parties, they are able to practice "blind brokering."
Blind brokering is critical to preserve market integrity, since the knowledge of who a buyer or seller is and their intentions can bias markets or lead to inefficient prices for particular trades.
For example, if a large bank needs to sell shares of a stock because the bank needs extra cash (liquidity), potential buyers with that knowledge (of who the seller is or their situation) can manipulate the price to take advantage of the need of the seller to offload shares at any reasonable price. Keeping the identity and intentions (and often the actual order size) a secret keeps the market fair.
Blind brokering allows traders to keep their positions and trading strategy to themselves. Without blind brokers, traders and dealers directly buying and selling securities would inevitably, though implicitly, be exposing information regarding positions and intentions to their counterparties or other market participants.
Blind brokers are sometimes used in other types of markets for similar reasons, such as employment recruiters who can advertise open positions without disclosing the name of the employer, at least initially.
While most securities trading today has moved to computer screens and electronic exchanges, human brokers still play an active role in certain markets. Inter-dealer brokers (IDBs), for instance, put together block trades in stocks, options, fixed-income products, and other securities for clients of large investment banks (dealers) rather than directly with retail clients.
There are generally two levels of blinding:
- The dealer (often the prime broker) does not reveal the true identity of the counterparties that are representing in the trade.
- The inter-dealer broker does not reveal the identities of the dealers or other institutional clients that they bring together.
Disclosure to either the buying or selling party of the identity of the other is not the norm in public securities trading, except in some cases of privately arranged transactions. The only exceptions to this are when the broker is a principal and selling securities from its own inventory to a customer of the firm. In this case, disclosure is required due to a possible conflict of interest.