Glossary

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.

Related Terms
Brokerage
A brokerage is a financial institution which allows its customers to buy and sell assets directly. Brokerages differ from exchanges in that brokerages serve as the counterparty to its users in all transactions.
Learn more.
Bid-Ask Spread
A Bid-Ask Spread is the difference between the price to buy an asset and the price to sell that asset.
Learn more.
Agency Model
The agency model of trading involves a brokerage customer trading with another investor or brokerage. The broker must find a counterparty willing to buy or sell the security for the same price as their customer.
Learn more.
Arbitrage
Arbitrage is the process of taking both sides of a trade simultaneously in order to realize an immediate and riskless profit. This is done by selling an asset in one market where the price is higher and buying it in another market where the price is lower.
Learn more.
Explore More Terms →