Glossary

Agency Model

1 min read

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.

Related Terms
Market Maker
A market maker is willing to buy or sell large quantities of an asset simultaneously. This adds significant liquidity to the market.
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Principal Model
The principal model of trading involves a brokerage acting as the counterparty to their customer’s desired trade using their own inventory of assets. Principal trading allows brokers to profit from the bid-ask spread.
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Exchange
An exchange is an institution which acts as a market-maker between parties who wish to buy and those who wish to sell. Exchanges simply facilitate trades between parties for a fee.
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Algorithmic Trading
Algorithmic trading is financial trading that is executed by software as opposed to humans. Trading algorithms have superior speed and computational power compared to humans.
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