Execution brokers are the middlemen in the capital market who provides order execution services to their clients in different markets. Execution brokers are well connected to all execution venues and exchanges and they can execute orders by matching orders from other clients/parties.
Execution brokers provide access to the major financial markets across the world and help clients to execute the trades on their behalf. Client orders are executed either on agency basis or matched principal or principal trading basis.
In agency execution, an execution simply routes the client order to the corresponding market or exchange where the order is matched and executed with another party.
In this case, an execution broker executes an order on a matched-principal basis by entering into the opposite side of a client’s trade. Also, the broker usually enters into an offsetting trade with another market participant in order to mitigate the market and other risks.
Principal Trading (Own Book):
Execution Brokers also execute trades taking the role of counterparty (principal) in order to hedge their own exposure. This is known as Principal trading or proprietary trading.