Could someone help me out in describing what this type of trade is along with advantages/disadvantages? Thanks.
To my knowledge its when you’re trying to offload a huge block of shares or trying to buy a big block. Either way you’re going to run into the issue of “who the hell want’s 400,000,000 shares of McDonalds right this second?” I.e., lack of liquidity in the market place to efficiently execute your order So, you do a principle trade with your broker where he basically commits significant capital to make it happen for you (i.e., he puts skin in the game) And to be compensated for this service he’s providing you, you typically give him a better price than the shares are going for.
Things to identify a prinipal trade may be necessary: 1. Time sensitive trade 2. Size is significant % of current volume
- You go to a dealer with a trade. 2. Dealer takes other side 3. Dealer hedges his newly acquired position in the market. You might have to work with the dealer though - give him a chance to place the other side before the deal is done. This is where the information leakage comes in. As AHHHH point out, the costs of doing this are likely to be higher because there’s an additional two sides of the trade to worry about, not just one. Also because the trade size is likely to be larger than average (market impact) to warrant you going to a dealer in the first place.