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Over the Counter (OTC) Brokers

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When you buy on an exchange, you are buying from another customer of
the exchange in quantities and prices agreed between you and the other
customer. The exchange is only involved with the deal insofar as it acts as
an escrow agent and has custody of your money and the other person’s
bitcoins, until they become your bitcoins and the other person’s money.
Every trade is shown to all other participants, and the order book moves
in real time in response to the trading activity. One characteristic of
exchange trading that a large trader may wish to avoid is that
transparency. Sometimes you want to trade large amounts without other
traders knowing, or without moving the market.
Enter the brokers. These are people or companies with whom you
establish a relationship. Instead of showing a transparent order book of
customer orders (as the exchanges do), the brokers will buy and sell
directly with you, negotiating a price for the full amount that you want to
transact, in what are known as ‘block trades’. Trade details are not
published to the public. They are private transactions in bulk and there is
nothing illegal about this—this also happens in the traditional financial
markets. Legitimate brokers also apply know-your-customer processes to
establish your identity and may be bound by local disclosure
requirements.
When you trade with a broker, there are two modes: the broker could act
as principal to the trade, or as agent.
When the broker acts as principal, the deal is just between you and the
broker. They are the counterparty to your trade. You tell them what you
want to do (buy or sell) and in what amount, and they will tell you their
best price and you can say yes or no. It is like a large wholesale trade, and
the broker needs to have enough money or cryptocurrency to complete
the deal. In accounting jargon, the trade is on the broker’s balance sheet
because the broker itself is trading with you. This is the case, for example,
when you buy foreign currencies at an exchange desk at an airport.
When the broker acts as agent, the deal is between you and someone else
with whom the broker is in touch. The broker acts as an intermediary
who serves to provide anonymity to both parties. In accounting jargon,
this is off the broker’s balance sheet—it’s not their money, they are just
matching buyers and sellers. Generally the way this works is that you
contact the broker and tell them what you want to do, then the broker will
try to find another customer who wants to do the opposite to you (the
other side of the trade). The broker will communicate price and amount
information to both sides until the deal is agreed. The broker takes a fee
from one or both customers for providing this service.
Due to the large amount of manual overhead and small margins, brokers
usually have a minimum trade size below which, they won’t pick up the
phone. This can be anything from $10,000 to $100,000 per trade and
seems to be increasing as the market matures.

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