In the previous article, we described that the agency model of a Forex broker involves routing ALL client trades to the interbank market. This process is quite complex, involving numerous participants and stages. It encompasses both a technical process for selecting the best prices and executing trades, and a financial one that converts figures into money.
Let’s examine the entire mechanism in detail.
General Mechanism of the Agency Model on Forex
1. Liquidity Providers. Liquidity is typically supplied by major banks such as Barclays, JP Morgan, UBS, Deutsche Bank, Bank of America, Merrill Lynch, and many others. Each provides its own liquidity stream—quotes through which they can execute trades. This is an avalanche of information with millions of prices that requires filtering. Each bank offers different prices and conditions. Data transmission occurs via the FIX protocol, a communication standard adopted by banks, prime brokers, and hedge funds.
2. Liquidity streams from various sources are directed to a liquidity aggregator—specialized software that acts as an intermediary, selecting the best price from those offered by liquidity providers for the requested volumes.
3. Trading. The trader submits an order, receives the best price from a liquidity provider, and the order is sent for execution. All trades are executed on behalf of the Forex broker and are anonymized. At this stage, a markup (mark-up) is added to the spread in the trading platform, covering fees for the liquidity aggregator, prime broker, and the Forex broker’s own profit. In the cTrader platform, clients pay a fixed commission on opening and closing trades, with no mark-up to the spread, which can be close to zero.
4. Prime Broker—a major bank that enters into agency agreements with all liquidity providers (LPs) selected by the broker itself. The company chooses the providers and informs its prime broker of their names. Essentially, the prime broker is like a river with multiple tributaries. It’s more convenient for a Forex broker to work with one prime broker rather than dozens of different banks, each with varying margin requirements, deposits, software, and so on.
On all stages, it’s clear that the dealing desk does not intervene in the agency model. The mechanism is technically complex but completely transparent to the client. The Forex broker acts as a filter between the client and liquidity providers, with sufficient capacity to route ALL trades to the interbank market.
A Forex broker operating under the agency model earns through commissions, and the company’s profitability depends on the volume of completed trades. To achieve significant turnover, the company must offer the highest level of services. Under this model, earnings drop several times compared to a market maker.
Why Do Companies Switch to the Agency Model, Complicating Their Lives?
Denis Sukhotin, head of FxPro, which transitioned to the agency model in 2012, answered this: «By avoiding any potential conflict between client and broker interests, we offer more transparent pricing and execution services. As retail Forex clients become more sophisticated and experienced, we believe demand for transparent and reliable execution models will drive the industry.»
A Fly in the Ointment: The Pseudo-Agency Model
However, not all companies prioritize client respect. With the popularization of the agency model idea, we’ve seen dishonest companies misleading traders. You might encounter videos demonstrating an alleged agency model where company representatives claim, in response to whether all trades must go to the interbank: «No.» They justify this by saying that routing small opposing trades incurs losses due to spreads.
But think about it, what’s the spread got to do with it? It’s the trader’s commission for the trade: when opening a position, the trader pays it in full! As we just learned, every spread includes the company’s commission or mark-up, which is the broker’s profit. Is the broker refusing profit?!
REMEMBER, a true agency model requires routing 100% of trades to the interbank! Regulators, whose licenses the company holds (if any), emphasize this strongly. And the company doesn’t lose on spreads—it earns from them. If you hear that only large trades or news-time trades should go to the interbank, or similar excuses, ask why this «broker» forgoes legitimate profit to internalize trades?! Isn’t it because «internalizing» means profiting from client losses?
Be vigilant when reviewing your company’s «agency model» scheme!
