The Forex market is relatively young, acquiring modern characteristics from 1971 to 1978 with the collapse of the Bretton Woods system. Nevertheless, it has been growing rapidly, with the average monthly turnover more than doubling over ten years in 2024. As a living organism, Forex continues to develop and evolve. Gradually, business models on the foreign exchange market are changing. In this article, we will discuss the main ones, as well as their advantages and disadvantages.
Market-Maker or ‘Kitchen’ Model of a Forex Broker
The market-maker model involves an over-the-counter market, meaning client orders are processed within the company.
Market-makers obtain quotes from banks or news systems such as Reuters, Dow Jones, Bloomberg. Spread is higher than the market rate and even fixed in rare cases.
There is a significant disadvantage to this business model: companies often want clients to lose their money, as it becomes profit for the broker.
Large companies with good reputations, licensed by authoritative regulators such as CySec or FCA, execute trades without dealing desk (the so-called Non-dealing desk model). They are regularly checked for slippage, offered prices, and trade execution time. Regulators monitor them: for example, in February 2014, FCA fined the American broker FXCM £4 million for using the practice of asymmetric slippage and insufficient transparency to the regulator. Fines have been imposed on popular companies in different years. This information can be easily found in search engines.
Another example, if the broker is registered on the Virgin Islands and similar offshore jurisdictions, you should be prepared for various unfair practices, such as delay in trade execution or trading at non-market rates. Companies do everything to make profitable clients lose their money, as their gain is a direct loss for the company.
Contracts of such companies are usually structured in a way that makes it impossible to file complaints. That’s why in Russia, only a few officially registered companies provide access to the foreign exchange market. All others are illegal.
Such companies build their marketing policies on human weaknesses: for greed and laziness, they offer sweet punch of bonuses, quick income without risk, and fixed income. For vanity, they offer purchased awards – hollow prizes. For entertainment, they offer bright memorable promotions, and so on.
Agency Model: A Forex Broker Who Needs a Profitable Trader
The agency model, on the contrary, involves sending all client positions to the interbank through a prime broker. Usually, a prime broker is a large bank. When a client clicks on the Sell or Buy button, his order goes through the prime broker into the liquidity pool, where banks compete to provide the best price for his request (banks earn on these operations). A special liquidity aggregation system selects the best quote and provides it to the forex broker’s client.
To conclude a contract with a prime broker, the activities of the forex broker must be as transparent as possible, and he must have appropriate licenses from authoritative regulators. In the agency model, spreads are always floating, since they are provided by liquidity providers, who are always different. The forex broker adds a margin to the spread (mark-up), which includes payment to the liquidity aggregator, the prime broker, and its own earnings. Essentially, the company is interested in a large volume of client transactions, as well as in the longevity of its clients on the Forex market.
Why Don’t All Companies Switch to the Agency Model
By abandoning the market-maker model, a company loses a significant portion of its profits. Consider this: a market-maker earns up to $200 per $1 million in trading volume, while the agency model gives only $70-80 for the same volume. Therefore, to work on the agency model, the company must first meet all regulatory requirements, and secondly, have a substantial volume that not only covers all costs but also generates profit.
Many industry experts see the future in the agency model: it is clearly an ethical approach to dealing with clients.
Algorithmic trading also plays an important role, gaining increasing popularity year after year. Thanks to trading robots, the frequency of trades increases, thus increasing the profit of a forex broker operating on the agency model.
Some believe that in the future, all brokers will be able to join one ECN network. Then client positions will be traded in a common space. Technologically, this is currently very difficult, and the industry must go through a long evolutionary path.
Once, a barefoot hippie on a fruit diet said that if none of his friends could come up with a better name, he would call his company Apple. Today, just a few decades later, Steve Jobs and Apple need no introduction. And perhaps the future is closer than we can imagine.
FAQ
What is a market-maker model in Forex?
The market-maker model involves processing client orders within the company, with quotes obtained from banks or news systems.
What is the agency model in Forex?
The agency model involves sending client positions to the interbank through a prime broker, with liquidity providers competing to offer the best price.
Why don’t all companies switch to the agency model?
Switching to the agency model requires meeting strict regulatory requirements and having a substantial trading volume to ensure profitability.
