DEFINITION of 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". Exceptions may occur for broker/dealers or others acting as both broker (agent) and principal on a given trade.

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 and/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.

BREAKING DOWN Blind Brokering

Brokers are in the business of effecting trades by matching buyers and sellers of a 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 will trust and fidelity 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."

While much 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. Here there are generally two levels of blinding: first, the dealer (often the prime broker) does not reveal the true identity of the counterparties that are representing in the trade; and second 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.