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What is a Cross Trade?

Malcolm Tatum
By
Updated May 16, 2024
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A cross trade is an investment strategy where a single broker executes an order to buy and an order to sell the same security at the same time. This often involves a seller and a buyer who are both clients of the same broker, although the cross trade strategy can involve one investor who is not a regular client of the broker. Depending on the regulations that govern the stock exchange where the securities are traded, this type of trading may not be allowed. Even in settings where the cross trade is considered an acceptable practice, there are usually some limitations on its use.

One of the issues that many financial experts have with the cross trade is that the broker may choose to not make the trades on the exchange. Instead, the broker may use the order to buy to offset the order to sell, effectively creating an exchange between the two clients. This opens the door for one or both parties to not receive the best price for either portion of the dual transaction, a fact that causes many investors and brokerage houses to refrain from engaging in this type of activity.

Due to the potential pitfalls of this type of transaction, many regulatory agencies have established rules that apply to when and how the cross trade may be used. In the United States, a broker must be prepared to present evidence to the Securities and Exchange Commission on why this type of transaction took place, and what benefit both parties received from the deal. Unless both investors received some benefit from the transaction, there is a good chance that the activity does not comply with the regulations put in place by the SEC.

A similar practice to the cross trade is known as matching orders. This is a situation where a broker has received an order to buy shares of a certain stock at a specific price, while also receiving an order from a different customer to sell that same stock at the same price. In some nations, the broker can simply match the two, effectively creating a swap between the two customers that allows each investor to receive what he or she desired from the transaction. In other settings, the broker must actually appear on the exchange floor, declare the intention to purchase the shares at the desired price, and ask if there is any objection. If not, then the broker proceeds to buy the shares, then offers them for the same price to the client. The broker benefits by charging transaction fees, and the two investors benefit from the quick execution of their orders.

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Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
By Telsyst — On Feb 06, 2014

I agree with you, Certlerant.

As an investor, I would stay away from this sort of trade, especially if I am the buyer.

Unless the broker can give you a very good explanation of why you should buy this stock from another client instead of on the market, this should raise red flags.

Never be afraid to ask you broker questions and/or to refuse transactions that he or she suggests.

Never just assume that brokers know best because trading is their job - they are in it to make money. It is up the client to make sure the broker is acting in his or her best interest.

By Certlerant — On Feb 05, 2014

Most brokers would most likely want to stay away from this transaction for a number of reasons.

Trades that are not made as part of the official exchange are not subject to transaction and brokerage fees. Unless the broker is trying to manipulate the selling price by avoiding the market, there wouldn't be much benefit to them for an even client-to-client trade.

In addition, the potential legal ramifications, even if the trade is conducted with the best of intentions, would keep most brokers away from this sort of trade.

Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
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