The agency model routes all client trades directly to the interbank market, ensuring no broker intervention. This complex process involves liquidity providers, aggregators, and prime brokers for transparent execution.
In the previous article, we explained that the agency model means outputting all client trades to the interbank market. This involves multiple participants and stages, combining technical price selection with financial settlement.
Agency Model Mechanism on Forex
Forex broker agency model diagram (Click to enlarge)
- Liquidity Providers. Major banks like Barclays, JP Morgan, UBS, Deutsche Bank, Bank of America, and Merrill Lynch supply liquidity streams of quotes for trade execution. This creates millions of prices needing filtration via the FIX protocol, the standard used by banks, prime brokers, and hedge funds.
- Liquidity streams from sources feed into a liquidity aggregator, software that selects the best prices for requested volumes.
- Trading. Traders submit orders, receive optimal prices, and execute anonymously on the broker’s behalf. A markup adds to the spread for aggregator, prime broker fees, and broker profit; cTrader uses fixed commissions with near-zero spreads.
- Prime Broker. A major bank handling agreements with selected liquidity providers (LP). Brokers choose LPs and notify the prime broker, simplifying dealings over multiple banks with varying requirements.
Throughout, no dealing desk intervenes. The process is technically complex but transparent to clients. The broker filters between client and liquidity, routing all trades to interbank.
Agency brokers earn commissions, with profitability tied to trade volume requiring top-tier services. Earnings drop significantly versus market makers.
Why Brokers Switch to Agency Model
Dennis Sukhotin of FxPro, which adopted the model in 2012, stated: “Avoiding conflicts between client and broker interests, we offer transparent pricing and execution. As retail Forex clients grow sophisticated, demand for reliable models drives the industry.”
Pseudo-Agency Model Risks
Some firms mislead traders with fake agency claims. Videos may show ‘agency’ setups but admit not all trades go interbank, citing spread losses on small opposites.
True agency outputs 100% of trades to interbank, as regulators demand. Brokers earn from spreads/markups. Claims of selective routing signal internal matching for client loss profits. Stay vigilant with your broker’s model!
FAQ
What is the Forex agency model?
It routes all client trades to interbank market via liquidity providers, ensuring no broker conflict.
How does a liquidity aggregator work?
It filters quotes from multiple banks to select the best prices for trade execution volumes.
What defines a true agency broker?
100% trade output to interbank with transparent markups or commissions; no internal matching.
