The Role of Banks & Brokers

Banks: Price-Maker/Price-Taker

In any transaction there are two parties - a 'price-maker' and a 'price-taker'. The price-maker quotes the price. The price-taker decides whether or not to deal at that price. In foreign exchange transactions each party buys one currency, and sells the other currency.

The role of price-maker is always performed by a bank. When banks deal directly with one another, banks also perform the role of price-taker. This is known as the 'interbank market'. Corporates, fund managers, retail customers and the Reserve Bank all participate as price-makers (although some companies act in this capacity as internal bankers to their subsidiaries). In a bank-to-bank transaction, the bank initiating contact is the price-taker, and the bank being contacted (which quotes the price) is the price-maker.

Consider the following example of an exchange of AUD for USD:

Party A Party B

Buys AUD <---> Sells AUD

Sells USD <---> Buys USD

The two parties perform different roles. One acts as a price-maker whilst the other is the price-taker.

NB: The interbank market consists of commercial banks and, to a lessor degree, financial institutions such as merchant banks and investment banks, accounts for about 90% of foreign exchange turnover globally.

Role of Brokers

Brokers facilitate the coming together of buyers and sellers by collecting prices from a variety of banks. The broker selects the highest bid rate, and the lowest offer rate, and combines them to establish the best two-way price available to calling banks. For example, if banks quote different prices as shown below, then broker price would be USD 1 = JPY 120.11/120.14. Calling banks find it easier and quicker to call the broker than to call all of the banks seperately.

Brokers charge a fee for their service known as 'brokerage'. The fees are negotiated by management and vary with the product. Discounts are provided based on volume of turnover.

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Broking Exchange Rate


USD 1 = JPY

Bid Offer
Bank A 120.09 120.14
Bank B 120.10 120.15
Bank C 120.11 120.16

Broker price 120.11 120.14

In recent years electronic dealing has become the dominant means of communication between interbank dealers. Dealing systems such as Reuters 3000 enable dealers to quote and transact with each other electronically rather than by telephone or facsimile. Similarly, electronic broking systems, such as EBS, have become a very popular alternative to voice brokers. Electronic dealing systems have the advantage that there is a printable record of completed deals, and deal capture into the back office can occur automatically. This reduces the risk of error, saves time and labour costs.