Execution-Only: What it is, How it Works

What Is Execution-Only?

Execution-only is a trading service that is restricted to only the execution of trades, without the client receiving any advice about the merits or risks of the investments or their suitability.

Execution-only, also known as agency only, services are predominantly internet-based or telephone-based, and are typically lower cost than more robust offerings. Since no advice is provided to customers, execution-only services are most suitable for experienced investors who are aware of the risks and rewards of various types of investments.

Key Takeaways

  • Execution-only is a brokerage model that only involves the execution and reporting of orders handed to them by customers.
  • Execution-only therefore means that ancillary services found in full service brokerages are absent, such as in-house research, or financial advice and planning.
  • Because of this, execution only trading platforms tend to be very low cost and economical for traders and investors who have a handle on what they wish to do in the market.

Understanding Execution-Only

To operate more efficiently, execution-only services make use nominee accounts. This means that the client's investments are registered in the name of the brokerage that operates the execution-only service, although the client remains the beneficial owner. While the brokerage handles all the documentation related to the buying and selling of securities, as well as collecting dividends and depositing them in the client's account, it will also forward information that needs shareholder action directly to the client.

As these firms only offer trade execution, improvements in trading platform technology have led to plummeting costs for such services. For retail investors, these execution-only services offer a very economical trading platform, and many of them offer stock trades for single-digit dollar commissions.

Research Offered by Execution-Only Services

Although they do not provide the kind of advice or recommendations offered by full service brokers, many execution-only services that are subsidiaries of larger financial institutions do make some investment research from their parent companies available to their clients. So while these clients ultimately have to make the investment decision on their own, they receive a wealth of information such as real-time market data, trading ideas, and analysis of trends to assist them in the decision-making process.

The brokerage executing the trade will not have an opinion on whether a trade should be executed, so leveraging an execution-only firm places an additional layer of risk on each trader or investor.

Cost of Execution-Only Services

The cost of execution-only services is a fraction of what it costs for putting through trade at a full-service brokerage or even most discount brokers. It is therefore primarily suitable for experienced traders, day traders and technical traders who may make numerous trades on any given day. However, traders should be aware of the risks of over-trading, which can lead to potentially steep losses that more than offset the low cost of trading through an execution-only service.

Using these services, investors can execute trades on many different types of securities, including stocks, bonds, mutual funds, exchange-traded funds (ETFs) and foreign exchange.

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