Does anyone have an idea of why soft dollar principles have always treated differently principal trades? I understand those trades are broadly defined from the broker perspective, anyway every deal done by a portfolio manager, for instance, is an agency type of deal if looked from the manager perspective. Why the difference in treatment? do those deals (principal type) carry greater risks? Some help please.
Yes they do. Deals done in principal trades are difficult to detect and may lead to fraud. For example, a firm may pay a broker excess commissions for allocation of a hot IPO. This IPO can be flipped, generally before the end of the stabilization period, for a fast profit.