What is a Brokered Market?
A brokered market involves agents or intermediaries in purchase and sale transactions to facilitate price discovery and transacting the execution.
Brokered markets often exist in areas of the economy where there is a certain level of expertise required to complete a transaction. In cases where members of the general public do not possess the necessary knowledge to facilitate transactions on their own, brokers, or agents/intermediaries, will be used. Brokered markets include all exchanges where listed instruments are traded, as well as markets for non-listed assets such as real estate.
The use of brokers as intermediaries between buyers and sellers aids market efficiency by fostering liquidity, reducing bid-ask spreads and boosting transaction volumes. Also, it’s important to note that brokers are not acting from their inventory. They are simple middlemen consummating a transaction between a buyer and a seller.
Understanding a Brokered Market
Brokered markets are the norm for most transactions, which can span the range from an investor selling 100 shares of a blue chip stock or a billionaire who wishes to buy a factory in a foreign country. In the former case, either the investor may sell his or her shares through a broker at a full-service brokerage, or online through a discount brokerage; a brokered market is used in either case, since the trade will be executed on a stock exchange. In the latter case, the broker would most likely be a specialist with in-depth knowledge of the country and the assets for sale therein.
Example of a Brokered Market
Let’s say a couple is looking to purchase their first home. They end up deciding on an area that is up and coming and fits within their budget. The couple will seek out and hire a real estate agent that is familiar with the area. The agent will learn about the desires of the couple for the home purchase, and then set about lining up showings of available homes.
Once the couple decide on the place they want to purchase, they will submit an offer to their agent, which the agent will in turn show the offer to the seller’s agent. If both sides agree to the price and terms, the transaction is made. The real estate agents brokered the trade and will receive a commission for their effort.