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What is Cross Trading?
Cross Trading is the process of offsetting BUY and SELL orders for the same stocks against trade on an exchange, which is prohibited on the majority of major stock exchanges. This can also happen when a broker executes both a purchase and a sell for the same security from one customer account to another, with the same portfolio manager managing both accounts.
Cross Trading – Global Network
Due to the lack of proper reporting connected to cross trading, investors are exposed to potential risks in relation to the financial outcome of a transaction. When trading without going through an exchange, one or both clients may not receive the best price based on current open market fair market pricing. Because orders are never made public, investors may be uninformed of possible pricing availability.
Cross-trading is only allowed in very specific situations. For example, when the buyer and seller are both clients of the same asset management firm and the prices are considered competitive at the time of the transaction.
Allowed Cross Trades
A portfolio manager can swap a bond or other fixed income instrument from one customer to another, essentially eliminating spreads on both the trading and trading sides. The broker and management must establish the trade’s fair market value and record it as a cross for the proper regulatory classification. Before engaging in a cross trade, the asset management must be able to demonstrate to the Security and Exchange Commission (SEC) that the transaction was profitable for both parties.
Cross Deals and Cross Trading related orders
While cross trading does not necessitate each participant offering a price per transaction, matching orders occur when a broker receives a purchase and a sell order from two distinct investors both stating the same price. These types of trades may be carried out, depending on local restrictions, because each investor has stated a desire in making a deal at a specific price. This is mostly valid for investors/traders who trade highly volatile assets, the value of which might change a lot in a short period of time.
In other cases, the contract must be announced before it can be implemented, providing those who aren’t engaged the opportunity to object. Objections may arise if another broker has a request that should be prioritized based on when the order was placed.