Principal trade order

What is principal trade order?

A principal trade is where you take the other side of the trade to the client - I.e. you are the counterparty. This is different from an agency trade where you go into the market on behalf of the client to purchase the asset from some other counterparty.

A principal trade order is one in which you are acting for yourself, not for a client.

This is my understanding of the whole concept with respect to Ethics. Would be good if someone can validate/confirm.

Agency Principal trade = trades bought for client’s account (by investment manager). (out in open market not using your own firm’s shares)

Principal Agency trade = your firm also in business as dealer and provides liquidity to your own investment department’s clients.

Since there is a clear conflict between agent side (wanna buy low) and principal side(wanna sell high), the two department should have information barriers, compliance should separate them out and also reporting and compansation should be separated out.


can you look at my explanation? is it incorrect?

Principipal trade is where a broker would commit his own capital to facilitate the trade. This is usually for very large trades where the broker may not be able to find adequate liquidity. Typically, the broker would charge higher commission for this as he is committing his own capital and taking the risk.

Agency trade is where a broker just acts on behalf on the client without any capital committed.

I see…

so there shouldn’t be information barriers between the two… neither need to reporting segregation?

I don’t think so…although someone else may confirm.

In this context, there’s more to it than what you wrote. I trade every day, fwiw.

*Principal traders* do what you described. However, a principal trade is where the firm satisfies a client order from its own inventory. This is why discretionary orders cannot be filled “As Principal” and must be filled “As Agent.”

An agency trade is one where the order is fulfilled in the market.

do you think what I wrote is correct?

nevermind… just searched ethics… no mention of compliance or information bariers.