Riskless principal: Difference between revisions

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-===The way I look at it===
+Depending on how you look at it, when it comes to [[equity brokerage]], a [[riskless principal]] is a kind of weird half-way house between a [[principal]] and an [[agent]].
-An Intermediary acts as [[Riskless Principal]] if, acting at Buyer’s request, it purchases an Asset from Seller for its own account (Principal Purchase), records the Asset in its own trading books and (whether or not immediately) sells it to Buyer (the Principal Sale), either at the same price (with a commission) or at a mark-up or mark-down (with no commission).  See
+*'''The legal view''': Legally, a [[riskless principal]] is just a [[principal]] with a feeble constitution: one of those indoorsy types who gets migraines and likes chess, and who only contracts with clients once he has arranged a contract with the market. Being a sookie, he arranges his life so that he bears no risk if the transaction goes wrong.
-Settlement capacity as against Transaction below.
+*'''The economic view''': A [[riskless principal]] is an [[agent]], but not the usual bookish sort, one who doesn't mind getting her shoes wet, picks up hitch-hikers, goes mountaineering and gets in bar-fights. Even though she doesn’t take any risk when she fills a customer order, she’s happy to hold the stock as it passes through.
-*As against Seller, Riskless Principal acts on its own behalf and not for Buyer.
-**There is a contract for the Principal Purchase between Seller and Riskless Principal, and therefore the Riskless Principal reflects the Assets in its own trading book.
+===What is the difference between [[agency]] and [[riskless principal]]?===
-**There is a contract for the Principal Sale between Riskless Principal and Buyer.
+'''[[Agency]]''': A  [[broker]] acts as [[agent]] if, acting at a client’s request and on its behalf, it purchases an asset from the market, separately charging the client a commission. As there is only one transaction (between client and market) an agent [[cannot]] charge a mark-up or mark-down. <br>
-*A Riskless Principal may be remunerated by means of either (i) a mark up or mark down between the Principal Purchase and the Principal Sale or (ii) a separate payment from Buyer to Riskless Principal which resembles a commission but is in fact not a commission.
+'''[[Riskless principal]]''': A [[broker]] acts as [[riskless principal]] if, acting at its client’s request, it purchases an asset from the market for its own account (as [[principal]]), records that transaction in its own trading books and more or less immediately, sells the same asset to the client (also as [[principal]]), either at the same price (with a “[[commission]]”<ref>Actually, it's odd for a [[principal]] to charge a [[commission]]. Normally, this is indicative of an agency arrangement. It is better to describe the remuneration paid to a riskless principal as a [[fee]].</ref>) or at a mark-up or mark-down (with no [[commission]]). Therefore there are two transactions; one between client and riskless principal; one between riskless principal and market.
+*As against the market, a [[riskless principal]] acts on its own behalf and not for its client.
+*As against the client, a [[riskless principal]] acts on its own behalf and not for the market.
+*A riskless principal may be remunerated by means of either (i) a mark up or mark down between the Principal Purchase and the Principal Sale or (ii) a separate payment from Buyer to Riskless Principal which resembles a commission but is in fact not a commission.
 *There is no Commission payable on a Riskless Principal contract.