What Is a Board Broker System?
The term board broker system refers to a method for managing the liquidity and orderly execution of orders on a commodity exchange or an options exchange. The board broker system consists of assigning specific commodities or options to members of the exchange. Those members are then responsible for acting as market makers in their assigned commodities.
Although popular when they first originated, most board broker systems have now been replaced by fully automated systems.
- A board broker system is a method for providing liquidity and limiting volatility on a commodities exchange.
- It is similar to the market-making activity that takes place on stock exchanges.
- The role of board brokers has been primarily replaced by automated electronic trading systems, which can exercise their responsibilities at higher volumes and much greater speeds.
- A board broker works for the commodity or options exchange and oversees a specific set of commodities or options depending on their expertise.
- Chicago Board Options Exchange (CBOE) is the most famous example of a board broker system.
How Board Broker Systems Work
A board broker works for a commodity or options exchange. They are responsible for overseeing the trading process for a specific set of commodities or options. They must also ensure that trades are conducted in an orderly fashion. Together, these employees make up what's called the board broker system.
The board broker system is similar to the system of specialists and market makers used in other exchanges, such as the New York Stock Exchange (NYSE) or the Nasdaq. In both cases, the goal of the system is to provide liquidity for all market participants and to decrease average transaction costs.
While the designated market makers (DMMs) of the NYSE may be required to provide market-making services for a particular security, board brokers on a commodities exchange are assigned specific commodities. The underlying services provided would essentially be the same, including providing price quotations, limiting market volatility, and informing the opening and closing prices of the securities or commodities involved.
The most famous example of a board broker system was the one used by the Chicago Board Options Exchange (CBOE). The exchange offers trading opportunities for securities such as options, futures, foreign exchange, exchange-traded funds (ETFs), equities, and other assets.
The popularity of the board broker system faded over the years, being replaced by fully automated computerized trading platforms.
Example of a Board Broker System
Here's a hypothetical example to show how board broker systems work. Let's say XYZ Financial is a member of the ABC Commodities Exchange, where it forms part of the exchange’s board broker system. XYZ is assigned one or more specific commodities and is responsible for helping other market participants trade in those commodities in an orderly fashion.
In trading, it is common for the demand for specific commodities on the ABC Commodities Exchange to occasionally outstrip their supply or for the opposite to occur. In those cases, XYZ is responsible for buying or selling that commodity to provide liquidity and reduce the volatility of trading in that part of the market. XYZ is also responsible for providing other services, such as establishing appropriate opening prices for commodities and reducing the transaction costs faced by market participants.
As commodities exchange has become increasingly automated in recent years, the role of board brokers and other market makers has changed. Today, firms like XYZ have increasingly been replaced by automated electronic systems directly operated by the exchange.
The popularity of the board broker system faded in recent years. It was gradually replaced with fully automated trade execution systems. These computerized systems are normally able to execute the role of board brokers more quickly and at larger volumes by essentially eliminating the need for human decision-making.