A cross trade is an investment strategy in which a single broker executes a buy order and a sell order for the same security at the same time.
A cross trade is an investment strategy in which a single broker executes a buy order and a sell order for the same security at the same time. This usually involves a seller and a buyer who are clients of the same broker, although the cross-trade strategy may involve an investor who is not a regular client of the broker. Depending on the rules of the stock exchange on which the securities are traded, this type of trading may not be permitted. Even in environments where cross-trading is considered acceptable practice, there are often some limitations to its use.
One of the problems many financial experts have with cross trading is that the broker may choose not to trade the stock. Instead, the broker can use the buy order to settle the sell order, effectively creating a trade between the two clients. This opens the door for one or both parties not to receive the best price for any part of the double transaction, causing many investors and brokers to refrain from such activities.
Due to the potential dangers of this type of transaction, many regulatory agencies have established rules that apply to when and how cross-trading can be used. In the United States, a brokerage firm must be prepared to present evidence to the Securities and Exchange Commission as to the reason for this type of transaction and what benefits both parties received from the transaction. Unless both investors have received some benefit from the transaction, there is a good chance that the activity will not comply with the regulations established by the SEC.
A practice similar to cross trading is known as order matching. This is a situation where a broker has received an order to buy shares of a certain stock at a specific price, while receiving an order from a different client to sell the same shares at the same price. In some countries, the broker may simply combine the two, effectively creating an exchange between the two clients that allows each investor to receive what they want from the transaction. In other situations, the broker must appear on the floor, declare his intention to buy the shares at the desired price, and ask if there are any objections. Otherwise, the broker buys the shares and offers them to the client at the same price. The broker benefits from charging transaction fees and both investors benefit from the speedy execution of their orders.