Agency Trading
Can someone please explain to me exactly what agency- only trading firms do? Thanks in advance
May 15, 2012
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Agency traders trade exclusively on behalf of clients, making money only on commissions (as opposed to spreads). They do not maintain inventory on their own books to facilitate client orders to buy or sell, and therefore have no market risk. They exist only to execute orders for clients in the market place. Think of a retail example:
Macy's is like a principal dealer, maintaing an inventory of goods to sell to customers. They carry the risk of the goods depreciating because they own them until they are sold. To compensate for this risk and make money they charge more for the goods then the price they paid for them (the spread).
Ebay is an agency trader, facilitating trades between members of the market, carrying no inventory, and make money only on commissions, charged as a percentage of each sale.
thanks a lot, especially for the example. With an internship in this field, what kind of opportunities are there for full time? I'm trying to make the most of this possible internship.
execution trader
I would think opportunities are basically limited to execution, maybe some sales roles. This is because agency traders don't need to understand risk, pricing, hedging, etc the way principal traders/market makers do. It's more about understanding the operational aspects of trading and selling clients on why they should use you as a broker.
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