Contra Broker
What Is a Contra Broker?
A contra broker is a broker that is taking the contrary side of a transaction initiated by another broker. For instance, in a transaction in which a broker wishes to sell securities to another broker, the buyer would be a contra broker for the reasons for that transaction. On the other hand, when a broker is hoping to buy, a contra broker would be on the sell side of that transaction.
Understanding Contra Brokers
Contra brokers ought not be mistaken for market makers. While market producers profit from the bid-ask spreads of the securities they hold in inventory, contra brokers are just the restricting party to a given broker order. In taking the contrary side of a trade, they may be trading for a client, or they may be trading for their own proprietary accounts.
Generally, contra brokers act for the benefit of their clients. Like market creators, contra brokers are an important supporter of overall market liquidity and fall under the regulatory oversight of the Securities and Exchange Commission (SEC) as well as any exchanges of which they are a member.
Brokerage firms will frequently keep up with associations with a number of preferred contra brokers. Through these associations, brokers can gather market intelligence from many statements, assisting them with picking which counterparties are generally fitting for a particular client's necessities.
Keeping up with such trading connections is likewise essential while trading large blocks of securities and in situations where the broker starting the transaction would rather not uncover the true size of the position to any one contra broker. By spreading the transactions across numerous contra brokers, the broker and their clients can keep a lower profile.
To guarantee the integrity of the markets overall, the Financial Industry Regulatory Authority (FINRA) screens broker-to-broker trades to guarantee that they are proven and factual and executed as quickly as possibly.
Real World Example of a Contra Broker
Luke is the overseeing director of a large brokerage firm. One of his clients wishes to make a large investment in a company with a moderately small market capitalization. The client is worried that assuming it becomes common information that they are investing in the stock, the price of the stock could rise before the full number of shares can be purchased. Hence, they request that Luke exercise alert in guaranteeing that the trade is executed with negligible visibility to different investors.
To oblige this request, Luke goes to his network of longstanding connections among other brokerage firms. He prudently asks about their clients' interests in the sector and discovers that a portion of the brokerage firms in his network have clients wishing to sell their shares in the stock.
Luke orchestrates to have several of these firms act as contra brokers for his client's purchase. By spreading the share purchases across different contra brokers, the transaction is less noticeable to other market participants, and the impact on the stock price is limited.
Features
- Contra brokers are counterparts to a transaction including another broker.
- They are totally unrelated to market creators, which play an alternate, however complementary, job.
- For brokers starting large transactions, it tends to be valuable to work with different contra brokers to make the transaction less apparent to other market participants.
