Agency Model
The agency model of trading involves a brokerage customer trading with another investor or brokerage.
The agency model of trading involves a brokerage customer trading with another investor or brokerage. The broker must find a counterparty willing to buy or sell the security for the same price as their customer. The agency model is a popular brokerage method for executing a customer’s orders.
Agency trading is more complicated than principal model trading, since these transactions involve the brokerage finding a counterparty, often at a different brokerage, to fulfill the other half of the client’s desired trade. As the number of participants in a trade increases, there are increased needs for bookkeeping, clearing, and settlement, to ensure the brokers client and the counterparty meet their respective obligations.
The agency model of trading is a brokerage arrangement where the broker acts as an intermediary, matching a client's order with another buyer or seller rather than trading from its own inventory. The broker earns a commission for facilitating the trade. Onramp provides Bitcoin financial services including trading, custody, IRA, and lending.
Frequently Asked Questions
What is the difference between agency and principal trading?
In agency trading, the broker matches your order with another market participant and earns a commission. In principal trading, the broker trades directly with you from its own inventory, profiting from the spread between buy and sell prices.
What are the advantages of the agency model?
The agency model reduces conflicts of interest because the broker does not trade against the client. It provides greater price transparency and often results in better execution prices since the broker seeks the best available market price.
How does the agency model apply to Bitcoin trading?
Some Bitcoin brokers use the agency model to match client orders with liquidity providers or exchanges, rather than taking the other side of the trade. This can offer clients more transparent pricing and reduced counterparty risk.
