The agency model, in the realm of order execution, describes a business framework where a broker or intermediary functions exclusively as an agent for their clients, rather than acting as a principal or market maker.

The broker's primary function in this model is to facilitate transactions between buyers and sellers by matching orders and providing access to liquidity from various sources, including exchanges, electronic communication networks (ECNs), or other market participants.

In the agency model, brokers do not assume any risk or hold positions in the securities or assets being traded. Their main duty is to deliver efficient and transparent execution services to their clients.

Brokers generally earn income through commissions or fees applied to each transaction, which are determined by the volume or size of the trade.

The agency model presents several benefits:

• Transparency: Since the broker acts solely as an intermediary and does not trade as a principal, there is a reduced likelihood of conflicts of interest between the broker and the client. Clients can trust that the broker’s primary goal is to achieve the best possible execution for their trades.
• Best execution: Brokers adhering to the agency model are required to pursue the best possible execution for their clients’ orders. They must take into account factors such as price, speed, size, and the probability of execution when directing orders to various liquidity providers or trading venues.
• No proprietary trading: Unlike market makers or principal traders, brokers operating under the agency model do not participate in proprietary trading. This means they do not take positions in the market for their own benefit, which can help reduce potential conflicts of interest.

However, there are also some potential drawbacks to the agency model:

• Higher fees: Since brokers do not earn from trading spreads or holding positions, they typically depend on commissions or fees for revenue. Consequently, the cost of trading under the agency model may be higher compared to other models where brokers profit from trading spreads.
• Limited access to liquidity: Some brokers operating under the agency model may not have the same level of liquidity access as market makers or principal traders, which could affect the speed and efficiency of trade execution.

Overall, the agency model seeks to provide transparent and impartial trade execution services to clients by eliminating potential conflicts of interest between brokers and their clients. This model is especially favored by institutional investors and high-frequency traders who prioritize best execution and transparent pricing.