Difference Between Principal Trading & Agency Trading

Trader's have to take advantage of every resource they can, given the many opportunities the stock market offers. A reliable stockbroker/stockbroking agency is the most important resource for any stock market investor.

This brings us to the next question - what happens when you buy or sell stock through a stockbroker's services? Here is the difference between agency and principal trading. These concepts are crucial to understand the process behind dealing in the stock exchange through a stockbroker. Here's a closer look at what agency trading and principal trading are.

What is principal trading?

First, let's look at the difference between agency and principal trading. Let's start with principal trading. Stockbrokers can conduct principal trading by buying stocks from a secondary market and holding them for a specified period before selling them. Important to remember that principal trading is where stockbrokers only buy and sell stocks for their own accounts, not their clients. Stockbrokers only execute transactions for themselves and not on behalf of clients.

Principal trading serves two purposes: it allows stockbroking firms to profit from price appreciation and yield profits for their portfolios. Important to remember is that principal trading requires that a stockbroker inform the exchange where the stock transactions will take place in order to be allowed to engage. This allows for trade regulation of large orders and protects regular investors from unethical trading practices like insider trading.

What is Agency Trading?

The definition of agency trading is next on the agenda. Agent trading is a form of stockbroker trading in which they transfer stocks to clients from different brokerages. This type of trading, which is performed on behalf of clients by a stockbroker, is far more complex than principal trading. The stockbroker charges a commission to its clients for the services it provides.

Agency trading can be described as the stockbroker taking your transaction request and seeking out another party looking for the same transaction at the other end. If your request for transaction to your stockbroker was for a sell order at a particular price, the stockbroker will request a transaction request for an order for a buy at that price. Once the parties have been found, the transaction will be recorded as an agency trade on the relevant exchange.

What are the differences in principal and agency trades

Let's now look at the agency trade vs principal distinction.

Principal trades are different from agency trades in that the traders benefit and the risk is shared by both the broker and the client. Principal trading is where trades are only executed for the stockbroker's benefit and their portfolios. Principal trades are therefore executed at the client's risk and not for the stockbroker. Agency trades are executed only for the client. The individual investor is responsible for the risk associated with the trades and not the broker.

The difference between agency and principal trading comes down to who they are mostly conducted for. Agency trading is primarily for individuals trading on the stock market. The stockbroking company executes each transaction. Their goal is to fulfill the client's order and solicit order requests from other investors.

Principal trading is for institutional investment benefits. Clients with large orders are the exception. In these cases, the stockbroker may use some of its inventory.

Conclusion

This can give stock market investors, both new and experienced, a better understanding of the trading process. Stock investors have the right to know how their orders were fulfilled by their stockbroker, whether they are principal or agency trading. It is always a good idea to work with a trustworthy stockbroker who has a strong reputation in the industry.