At Goldman Sachs & Co., New York, the firm's own traders are completely separate from the traders who handle customer orders, and its policies prevent the two sides from sharing information, according to spokesman Ed Canaday.
He added: "If we were to trade using client information for our own account, and that were to become public, it would shut down our business. The risk of doing that is so great that it's not a viable option."
Mr. Fogg said the alleged abuses that have come to light have been helpful for the industry.
"They really put a proper focus on these transactions in terms of the way they should be structured and ensuring only the appropriate information is shared," he said.
Instinet LLC, New York the electronic, agency broker, calls itself the "unconflicted" broker.
"There are many layers of principal trading, and at times there may be useful reasons to go out and get capital from broker-dealers," said Michael Plunkett, president, North America, at Instinet.
"I could argue as a purist that you should always use an agency broker for lowest execution cost," he said. "But I don't think that would make sense."
While pure execution costs for an agency trade might be lower than for a principal trade, principal brokers can offer services such as research, investment banking and access to other markets as part of an overall package, which can be valuable for some institutional clients, like pension funds.
Mr. Fogg said his firm can separate out the non-trade execution portion of a principal trade so investors can compare agency and principal rates equally — a comparison he said is key for institutional investors.
He said some pension funds and investment managers determine the best method by evaluating expected transaction costs on an agency broker basis and comparing that with a principal guarantee offered by a principal broker.
"Some pretty sophisticated investment managers use the principal rate almost as a hurdle rate and evaluate where they think the transaction should trade, and compare that to levels in the market," he explained. "If they get a level that's good enough, relative to where they think it should trade, they'll go ahead and use the principal alternative. If not, they'll probably go the agency route."
But being able to compare the transaction costs of an agency trade with those of a principal trade on an apples-to-apples basis is not always easy.