Financial Education

In an agency trade, a fund manager negotiates a competitive commission rate and then chooses a broker who is expected to provide the lowest total cost for executing the trade. The broker then “works” the order by finding a suitable party to take the other side of the trade. In contrast to a principal trade, the broker is not accepting the opposite position or the risks associated with the opposite side of the trade. Effectively, the responsibility of seeking best execution has been delegated to the broker.

Provided that the broker does obtain the best execution, the manager can execute the trade with minimal cost. Often, however, there is an opportunity cost during the time the trade is being worked. In addition, since the responsibility for best execution has been delegated the direct commission cost may be higher than would otherwise be available.

For more information, see all articles on: Active Management, Investing in Stocks, Portfolio Management

See also:

Crossing Trades Externally

Crossing Trades Internally

Continuous Markets

Using VWAP to Measure Transaction Costs

Algorithmic Trading Methods