Interdealer brokers sit between investment banks. They help find buyers and sellers of large, usually illiquid blocks of securities at other investment banks or dealers. They might conduct deals on behalf of large corporations, but the corporations generally go through the investment banks first. Interdealer brokers are used when banks want to move large illiquid assets such as interest swaps, commodities or blocks of shares. They are paid a commission for negotiatiing the deal between the buyer and the seller. Many of the deals they arrange are conducted off-exchange.
There are five main global interdealer brokers: ICAP, Tullett Prebon, Tradition, BGC Partners and GFI Group. Many were founded in the 1980s as trading globalised and investors increasingly turned to tailored hedges such as interest rate or currency swaps to offset risk. About 70 per cent of the global business is conducted either in London or New York.
Interdealer brokers do not participate in the daily London interbank offered rate-setting process, although some of the products they do trade are based on it. However, their roles as intermediaries make them key conduits in the market for information for other banks.
A broker will typically have several screens of data on his desk plus more information coming through on the telephone as well as an internet-based chatroom or instant messaging system from a provider such as Bloomberg or Reuters connecting him to his main customers at the banks. Through these electronic channels flows a stream of news, market sentiment, jokes and industry gossip. It was these messages that formed the backbone of regulators' investigations and criminal charges relating to the alleged manipulation of the Libor rate.
The Libor scandal put the spotlight on interdealer brokers. In December 2012 the UK Financial Services Authority alleged that traders in UBS, the investment bank, had been paying interdealer brokers through wash trades – transactions that have no other purpose but to generate fees. In January 2013 it emerged that ICAP, the world's largest interdealer broker had become a focus of the FSA Libor interbank rate-rigging investigation.
In September 2013, ICAP agreed to pay £55m to settle Libor claims.
In May 2013, a small UK broker called RP Martin also became a focus of global regulatory investigations. Two RP Martin employees were arrested by the UK's serious fraud office in December.