Principal Model

1 min read

The principal model of trading involves a brokerage acting as the counterparty to their customer’s desired trade using their own inventory of assets. Principal trading allows brokers to profit from the bid-ask spread.

Principal trading occurs when a brokerage buys securities, holds these securities for a variable period of time, and then sells them. Principal trading allows brokerages to generate profits for themselves through the price appreciation of the assets they bought in a previous time period and held versus the price they trade them at. Therefore, the brokerage makes additional profits above commissions.