shutterstock_105325643Trading stocks nowadays is more convenient and easier than ever before. Trading stocks online takes just a few clicks. But behind each stock trade, there are different processes involved that make buying and selling stock more complicated than what you usually encounter. Whenever you trade stocks online, you either trade with a broker or you are trading with another person or through an exchange. The two main types of trading that happens in the background can either be a principal or agency trades.

What is Agency Trading?

An agency trading is a type of transaction wherein a brokerage firm searching and transferring stock shares a client may request by dealing with other brokerages or clients. It can be quite a complicated process since it may involve searching for shares outside of the brokerage and then trying to make the transaction based on a client’s request. It may involve very stringent and accurate bookkeeping between participating agencies to ensure that the transactions and transfers are properly cleared, settles and reconciled.

The first step in an agency transaction starts with your broker trying to search and find the right securities exchange for the type of stock a client wants to buy. After finding the right exchange, the broker then tries to find another trader willing to sell the stock at the same asking price as the client. Once found, the exchange records the transaction on its ticker tape and then the transfer of securities occurs between the two parties along with the involved payments. After that, the process of clearing and properly documenting the trade occurs. Although both parties in the transaction have their recording of all transactions made with clients, clearing of the transaction is handled by a larger institution. Most of the clearing duties is handled by the Depository Trust Clearing Corporation or DTCC.

Principal Trading

Principal trading occurs when the brokerage transacts with clients over stock shares that they are holding. Brokerage firms also buy securities in the secondary market and then holds on to them with the hope of selling them for a profit at a later time. So if a client request for a trade about a certain securities that the firm has in its own inventory, the brokerage sells the shares to clients. Principal trading helps make it easier for brokers to handle client trading request especially with the securities in question are already part of the firm’s own portfolio. There is no need to search for the shares outside. And also, principal trading helps provide additional profits for the brokerage firm aside from the commissions they get for each transaction made.