What is defined as a principal trade?

A principal trade occurs when a broker engages in transactions for their own account rather than acting as an intermediary for a client. In this scenario, the broker purchases or sells securities directly, taking on the risk and potential profit or loss associated with those trades. This type of trading allows the broker to benefit directly from market movements, as they are dealing with their own capital.

The key characteristic that distinguishes a principal trade is the broker's role in the transaction. Unlike acting as an intermediary or executing trades on behalf of clients, a principal trade involves the broker making decisions based solely on their interests and capital. This transaction type also implies that the broker is effectively competing with their clients for price and execution.

In contrast, the other options describe different roles fulfilled by brokers that do not align with the concept of principal trading. For example, acting as an intermediary for clients involves taking orders and executing transactions on behalf of clients, with the broker not taking on the price risk directly. Similarly, executing trades on behalf of multiple clients or providing advisory services highlights relationships and roles distinct from that of principal trading.