Soft dollar standard question question

MarginofSafety

"It is permissible to use client brokerage from AGENCY TRADES to obtain research which may not directly benefit the client. Over time, however, the client should receive a benefit from the research".

"As long as no fiduciary regulations apply, it is permissible to use client brokerage obtained from PRINCIPAL TRADES to benefit other client accounts, as long as this is disclosed to the client and prior consent is received".

Does anybody see the logic of different Agency and Principal trades treatment? If both agency and principal trades are client's asset, why are there such exceptions?

Thank you

tianxin

my understanding is that a principal transaction means that the broker is selling you an asset out of its own inventory. So the 'commission' is implicitly built into the asset's price. I suppose because it is less transparent (relative to broker commissions), you as the investment manager need to be more up front with clients about it...

CPATrader

Think of it like this - for a principal trade the other side of the transaction is the broker/dealer, so there is no commission just the price they are paying you for, in most cases, the bond. Most principal trades, not all, these days are for FI securities. For an agency trade the B/D is acting as a middle man so he has to get paid and tacks on a commission for his service of finding you a buyer or seller. I know what you are talking about on the SD issue and dont totally understand it either, I think they would hard pressed to get that deep, famous last words.

tarunajwani

Principal trades are at a discount? I don't know what that means.

Principal trades are from the firm's own accounts. Agency trades are from client accounts.

Uranus08

Agency trade includes commission, think the agent/broker needs to get paid, principal trades are done one net basis, meaning commission is factored into price of security.

chandsingh

AGENCY TRADE= broker/dealer does not commit their own capital to the trade, they are just an "agent" trying to match a buyer & seller

PRINCIPAL TRADE= you press a button, give all of your order to the broker, they commit their own capital in order to take it off your hands, now they have to go get rid of it but the broker is bearing the risk, not you cuz you are out of the picture now.

Now the client brokerage policies with these I'm not sure about...

yospaghetti

Actually, I don't even really know what's the difference between an agency and a principal trade...