What is a Contra Broker
A contra broker takes the opposite side of a buy or sell order from that of the initiating broker submitting a trade on a client's behalf. So, in a trade where a broker is looking to sell, a contra broker would be the buyer. Conversely, when a broker is looking to buy, a contra broker would be on the sell side of the transaction.
BREAKING DOWN Contra Broker
Typically, a contra broker will be acting on behalf of their own client when filling a given trade. Contra brokers add efficiency and liquidity t to the marketplace by aiding in the filling of orders by other market participants.
The Difference Between Contra Brokers and Market Makers
Although contra brokers add liquidity to the market, they should not be viewed as market makers, as they do not guarantee that orders will be filled. Market makers make money from the bid-ask spreads (difference in price between buy and sell prices for a security or financial instrument). They may trade for their own accounts (principal) or for customer accounts (agent). By providing liquidity, they help ensure the orderly function of markets. They are regulated by the Securities and Exchange Commission (SEC) as well as by the exchange of which they are a member.
Contra brokers, in contrast, are simply the opposing party to a given broker order. In taking the opposite side of a trade, they might be trading for their own firm (proprietary) accounts or they might be trading on behalf of a client. After both brokers agree to the terms of their trade, they must perform a trade comparison, where both sides match the details of trades booked (including security, quantity, and price) with trade comparisons.
Institutional brokers maintain relationships with a number of preferred contra brokers allowing them to gather market intelligence and a range of quotes from which to choose in making trades. Maintaining multiple trading relationships is also essential when trading large blocks of securities and in cases where the originating broker does not want to reveal too much about the size of its position in a given security to any one contra broker. In the case of discrepancies between the broker and contra-broker must be reconciled before trades can be cleared. Financial Industry Regulatory Authority (FINRA), the industry’s self-regulatory body, sets rules for and monitors and reports results on firms’ trade reporting and execution including compliance with its timeframes accepting, declining, and comparing trades between brokers and contra brokers.