A principal trade occurs when a brokerage house buys
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
on the
secondary market
The secondary market, also called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. The initial sale of the s ...
with the express strategy to hold long enough for a price
appreciation. At that point the broker sells retails to the end use and gains appreciation plus
commission. Brokers are required to notify when they provide a principal trade, though will typically obfuscate the fact through the
fine print
Fine print, small print, or mouseprint is less noticeable print smaller than the more obvious larger print it accompanies that advertises or otherwise describes or partially describes a commercial product or service. The larger print that is us ...
. The broker always seeks to sell their
inventory
Inventory (American English) or stock (British English) refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation.
Inventory management is a discipline primarily about specifying the sha ...
to prospective buyers rather than buying new into the market. Common in
bond sales.
In the US, The Securities and Exchange Commission oversees principal trading at registered advisors and funds for compliance with Investment Company Act of 1940
ection 17(a)and with the Investment Advisers Act
ection 206(3) The SEC can take enforcement action if it suspects improper activities or lack of appropriate disclosures.
Financial markets
{{Econ-stub