Agency Execution
Agency execution refers to the process where a broker-dealer executes trades on behalf of clients without taking on principal risk. This model focuses on achieving the best possible execution for clients while earning commission-based revenue, in contrast to principal trading vs agency trading where dealers trade for their own account.
How agency execution works
Agency execution involves brokers acting as intermediaries between their clients and the market. When a client submits an order, the broker's primary obligation is to achieve the best possible execution while adhering to the client's instructions and regulatory requirements.
Best execution obligations
Agency brokers must comply with strict best execution policies that require them to:
- Consider multiple execution venues
- Monitor execution quality
- Avoid conflicts of interest
- Provide transparency to clients
These obligations are particularly important under regulations like MiFID II in Europe and SEC rules in the United States.
Technology and infrastructure
Modern agency execution relies heavily on sophisticated technology:
- Smart Order Routers (SOR) to access multiple venues
- Order Management Systems (OMS) for order handling
- Real-time trade surveillance for compliance
- Transaction cost analysis for performance measurement
Agency execution has evolved from simple order routing to sophisticated electronic trading services that leverage advanced analytics and artificial intelligence to optimize client outcomes.
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Commission models
Agency brokers typically earn revenue through commission-based models:
Risk management considerations
While agency execution doesn't involve principal risk, brokers must still manage various operational risks:
- Pre-trade risk checks for client orders
- System capacity and reliability
- Operational resilience
- Regulatory compliance monitoring
Measuring execution quality
Brokers use various metrics to evaluate execution performance:
- VWAP slippage
- Implementation shortfall
- Market impact cost
- Fill rates and speed
Market structure implications
Agency execution plays a crucial role in market structure:
- Promotes market efficiency
- Reduces conflicts of interest
- Supports market liquidity
- Facilitates price discovery
The evolution of agency execution continues to shape modern markets, driving innovation in trading technology and market structure design.