Can anybody give an example as to what this is? In practice? I found my self knowing by heart that its supposed to be a discount / spread trade but I dont really understand what exactly this means or why we treat it differently…
Principal trade - I buy currency from a interbank dealer. His cost of lets say USD/CAD is 1.0500. He sells it to me at 1.0520. He makes 20 pips. Basically the dealer OWNS the currency to be sold.
Agency trade - I buy currency from a broker. Cost in the market USD/CAD is 1.05. He doesn’t add a spread since he is not a principal, but he charges me a % of the trade. The broker here DOES NOT OWN the currency. He simply sources it for me, and charge me a brokerage fee or what not. A middle-man.
Great example, thank you very much. Any intuition as to why we treat these two in a slightly different manner though? Isn’t it the same from the point of view of the investment manager? Is it that in practice e.g. the research given under principal trades is somehow different than in agency? Excuse my ignorrance…
Prinicpal - possession of currency
Agency - middle man
Got it 