Mechanism of broker's work on the agency model in the market
In ours. previous article we have described that the agent-broker model is an inference ALL of the client's transactions to the interbank market. This process is quite complex, and it involves many participants and stages. At the same time, there is both a technical process, in which the best prices are selected and transactions are made, and a financial one, which converts figures into money.
The general mechanism of the agent-based model on
1. Liquidity providers. Liquidity is usually supplied by large banks such as Barclays, JP Morgan, UBS, Deutsche Bank, Bank of America, Merrill Lynch, and many others. Each of them supplies its own liquidity flow - of offers at which they can execute a trade. It is an avalanche of information with millions of prices that needs to be filtered. Each bank has different prices and different conditions. The data is transmitted using the FIX protocol, a communication standard adopted by banks, prime brokers and hedge funds.
2. Liquidity flow from different sources is directed to liquidity aggregator - is a special software, an intermediary that allows you to choose the best price from those provided by liquidity providers for the requested volumes.
3. Bidding. The trader sent a request, received the best price from the liquidity provider, and this request is sent for execution. All transactions take place on behalf of -brokerthey're depersonalized. At this stage the spread is added to the spread on the MT4 platform mark-upwhich consists of liquidity aggregator fees, prime broker fees, and of your own earnings - a broker. In the cTrader platform, the client pays a fixed commission when opening and closing a trade, there is no mark-up to the spread, so it can be close to zero.
4. Prime broker - is a large bank, which concludes agency agreements with all Liquidity Providers (LP) selected by the broker himself. The broker himself selects the liquidity providers and informs his Prime Broker of their names. In essence, a prime broker is like a river with many channels. -It is more convenient for a broker to work with one prime broker than with dozens of different banks with different margin requirements, different deposits, software, etc.
At all stages, it can be seen that under the agent-based model. there is no dealing intervention. The mechanism of work is technically complicated, but it is absolutely transparent for the client. -The broker works as a filter between the client and the liquidity provider, having sufficient capacity to output ALL transactions on the interbank market.
-broker on an agency model works for its commission, and the company's payback depends on the volume of completed transactions. And for the turnover to be significant, the company needs to have the highest level of services offered. In this model, earnings are reduced several times compared to a market maker.
So why would companies move to an agency model, making life harder for themselves?
Denis Sukhotin, head of FxProwhich switched to an agency model in 2012, answered this question: "By avoiding any potential conflict between client and broker interests, we are offering more transparent pricing and execution services. As retail clients have become more sophisticated and experienced, we believe the demand for transparent and reliable execution models will be a major driving force in the industry."
A spoonful of tar: the pseudo-agent model
But not all companies are guided by respect for the client. With the popularization of the idea of broker's work on the agency model, we started to meet information from dishonest companies, which deliberately misleads traders. Thus, you can meet video clips, with a clear display of allegedly of the agency model, in which the "correct answer" to the question to the representatives of the company whether all deals should be brought out to interbank under such scheme of work is given: "No". This statement is motivated by the fact that by withdrawing small opposite deals, the company incurs losses due to allegedly spread.
But think about it, what does the spread have to do with it? Spread is a trader's commission for a transaction, opening it, he himself pays it in full! At the same time, each spread, as we have just found out, includes the company's commission or mark-up, which is the profit for the broker. The broker's giving up profits?!
REMEMBER, the true agency model involves withdrawal of 100% trades on interbank market! It's especially emphasized regulatorsThe company has licenses (if it has them, of course). And, of course, the company does not lose on the spread at all, on the contrary, it earns. If you hear that it is correct to withdraw only large deals or deals at the time of news release, or any other similar variant, immediately think about why such a "broker" refuses to receive legitimate profit in favor of overlapping deals inside the company! Isn't it because "overlapping trades" makes profit in the form of client's loss?
Be vigilantConsidering the scheme of operation of your company's "agency model"! Until wise regulation is introduced in the Russian market, a potential client will have to understand the details himself well enough not to fall for marketers who promise an agency model without taking transactions to the interbank market, without even being embarrassed by this fact.