Agency Model Forex brokers
What exactly is “Agency model” Forex broker?
“Agency model” is just a fancy name for “No Dealing desk”. That’s it. Simple, straight.
In other words, in Forex there is Agency model dealing and Principal model dealing.
Agency model = No dealing desk (STP, ECN, DMA)
Principal model = Dealing desk (Market maker)
Where did it all come from?
Never popular before, the term “Agency model” has been re-introduced around 2012-2014.
A few large Forex brokers simply announced that they’re now turning away from Market Maker practices and into an Agency Model dealing.
This sure sounded attractive to all newcomers, who barely understood what “Agency Model” means, but at least it was clear that there will be no more Dealing desk (Market making) involved. And that fit the bill.
[table id=19 /]
How “Agency model” works
In the Agency model, Forex brokers act as agents. They accept orders from clients and send them to the liquidity providers. By being a simple intermediary, agency model brokers don’t execute trades themselves, and hence have no conflict of interests with their clients and partners.
On the contrary, Principal model brokers will accept and execute clients orders themselves, thus acting as a principal = a dealing desk, and here the conflict of interests can arise.
Hybrid model (Agency + Principal)
Nowadays, many brokers have chosen a Hybrid model (Agency + Principal dealing).
In the Hybrid model, instead of being a simple intermediary (a so called “corridor” between clients and liquidity providers), Hybrid Forex broker executes 2 trades with each side: first he fills clients orders himself as a Principal, and then goes to the liquidity providers to executes another trade with them, hence acting as an Agent this time.
An example of the Hybrid model these days would be FxPro: Quote: “FxPro’s execution model works in the following manner: the flow of trades is internalized before any positions/trades are externally hedged. The internalization process is based on very rigorous and detailed risk management techniques centered on many risk parameters,
which are continuously evaluated and monitored by the senior management.”
Many brokers found Hybrid model being more commercially viable than pure Agency model.