What is a cross trade?
The cross trade is an investment strategy where one broker makes an order for purchase and sell the order to the same security at the same time. This often includes a seller and buyer who are both clients of the same broker, although the strategy of cross trade may include one investor who is not a common client of a broker. Depending on the regulations that control the stock exchange where securities traded, this type of trading may not be allowed. Even in the settings where the cross trade is considered to be acceptable practice, there are usually some limitations of its use.
One of the problems that many financial experts with cross trade have is that the broker may decide not to create trades on the stock exchange. Instead, the broker can use an order to purchase an order for sale and effectively create an exchange between the two clients. This opens the door for one or both sides to not get the best price for or part of the double transaction, which is a fact that makes manyInvestors and intermediary houses will be involved in this type of activity.
Due to the possible pitfalls of this type of transaction, many regulatory agencies have set rules that apply to when and how cross trade can be used. In the United States, the broker must be prepared to submit to the Securities and Exchange Commission evidence of why this type of transaction occurred and what the two parties received from the agreement. If both investors have not received an advantage from the transaction, there is a great chance that this activity does not meet the SEC regulations.
Similar practice as cross trade is known as corresponding commands. This is a situation where the broker received an order to purchase shares of a particular stock at a particular price, and at the same time received an order from another customer to sell the same price for the same price. In some countries the broker can simply match these two and effectively youto create an exchange between two customers that allows each investor to get what he wants from a transaction. In other settings, the broker must actually appear on the stock exchange floor, declare the intention to purchase shares at the required price and ask if there is any objection. If not, then the broker continues to purchase shares and then offer them the same price. The broker benefits the fact that he charges the fees for transactions and both investors benefit from the quick execution of their orders.