Matched principal trading is a way of executing a client order in which the firm interposes itself between the client and a counterparty, buying from one and selling to the other in offsetting transactions carried out simultaneously. The firm is legally the counterparty to both legs, so it appears as principal on the contract, but it does not intend to hold market risk from the trade: the two sides are matched against each other.
The model sits between pure agency, where the firm never becomes a counterparty at all, and full principal dealing, where the position goes onto the firm's own book. It changes both what the firm earns and what it is exposed to. A matched principal broker is remunerated by a disclosed commission or mark-up rather than by the outcome of the position, and its exposure is credit and settlement risk on two counterparties rather than price risk. Which model applies to a given instrument is stated in the execution policy.
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