Broker's operation models: "kitchen" and interbank

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The market is quite young, it began to acquire modern features in 1971-78 with the collapse of the Bretton Woods system. Nevertheless, the market is growing at a significant rate, with average monthly turnover more than doubling over a decade in 2013. Like a living organism, it develops and evolves. Gradually, it is changing business models on the e. And in this article we will highlight the main ones, as well as their pros and cons.

There are two main business models on the market: agency model and model market maker.

Маркет-мейкер или “кухонная” модель брокера

The market-maker model implies an over-the-counter market, that is client orders are processed within the company. The market maker receives quotes from banks or news systems such as Reuters, Dow Jones, Bloomberg. Spread low, and often fixed. This business model has a significant disadvantage: often companies are interested in the client losing his fundsа. «Ни для кого не секрет, что порядка 95% трейдеров теряют свои деньги. А убыток клиента – прямая прибыль для брокера с такой моделью”, – отмечает соучредитель ребейт сервиса GlobeGain Александр Макаров.

Large companies with good reputations and licenses from reputable regulators, Suses or FCA, execute transactions without dealing (the so called "model")Non-dealing desk"). They are regularly checked for slippages, offered prices, and transaction execution times. And the regulator is vigilant: for example, in February 2014, the FCA fined the large American broker FXCM an unprecedented £4 million for "using asymmetrical slippage practices" and insufficient openness to the regulator. Over the years, fines have been imposed on popular companies with a large presence in Russia. Information about this can easily be found in search engines.

Another example, if the broker is registered in the Virgin Islands and similar offshore jurisdictions, then you must be prepared for various unfair methods of work, such as transaction delay or trading on non-market quotes. Companies do everything to make a profitable client lose their money, because their gain is a direct loss to the company. Contracts of such companies are usually drafted in such a way that it is simply impossible to make a claim. The domestic regulator of OTC financial instruments and technologies (CRFIN) is also concerned about the situation in the industry, he compiled a black list of unscrupulous brokers, and in fact, scammers. However, the list is only advisory in nature, and does not prevent its subjects from attracting more and more new clients.

Such companies build their marketing policy on human weaknesses: for greed and laziness they have prepared a sweet punch of bonuses, quick earnings with no risk, and fixed income. For vanity - bought rewards - pacifiers. For fun - flashy memorable promotions like "get our logo tattooed on your body and get paid." And, of course, aggressive advertising on all available resources, including not only the Internet, but also newspapers, radio, and even television.

Agency model: a broker who needs a earning trader

The agency model, on the other hand, implies withdrawal of all client positions to interbank through a prime broker. Usually the prime broker is a major bank, such as Morgan Stanley. When a client presses the Sell or Buy button, his order goes through the prime broker to the liquidity pool, where banks compete to provide the best price for his request (the banks make money on these transactions). A special system, the liquidity aggregator, selects the best quote and provides it to the client -broker.

In order to conclude a contract with a prime broker, the activities of the broker must be as transparent as possible, and he must have the appropriate licenses from reputable regulators. In the agency model spreads are always floating, поскольку их представляют поставщики ликвидности, а они всегда разные. –broker makes a surcharge on the spread (marcap)which includes fees to the liquidity aggregator, prime broker, and its own earnings. In fact, the company is interested in a large volume of client operations, as well as in the "longevity" of its clients on the e.

One of the former co-founders of FxPro, Pavel Novikov, who now acts as an investment manager, noted in one of his interviews: "I see the future of PAMM-accounts in those companies where PAMM-service works on the agent model, where there is no conflict of interest between the company and the trader.

If the agency model is so promising and good, why don't other companies switch to the agency model as well?

"By abandoning the market-maker model, the company loses a significant part of its profits. Judge for yourself: a market-maker earns up to $200 for the trade turnover of $1mln, while the agency model gives only $70-80 for the same volume. Thus, in order to work under the agency scheme, the company, firstly, must meet all the requirements of regulators, and secondly, have a very impressive turnover, which is able not only to cover all the costs, but also to give more profit., – сказал глава российского представительство FxPro Dmitry Kostin.

Many reputable industry experts see the future in the agency model: it is clearly an ethical point in the approach to their clients. "The company's clients often ask what the company gets its profits from, and we can say with a clear conscience - only commissions from turnover. And definitely not from your loss"., – отметил Дмитрий Костин.

No less important is the role of algorithmic trading, which is gaining in popularity from year to year. Thanks to trading robots, the frequency of transactions is increasing, and therefore so is the profit of the -broker on the agent model.

There is an opinion that over time it will be possible to combine all brokers into one common ECN network. Then client positions will be traded in a common single space. While this is incredibly difficult technologically, the industry has a long evolutionary way to go.

Once upon a time, a barefoot hippie on an apple diet said that if none of his friends could come up with a better name, he would name his company Apple. Today, only a few decades later, Steve Jobs and Apple need no introduction. And perhaps the future is closer than we can imagine.

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