Cross trading is when a broker executes a buy and sell order for the same security at the same time, which can be problematic as the broker can choose not to trade on the exchange. Regulatory agencies have established rules for cross trading and a similar practice is matching orders.
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 often involves a seller and a buyer who are clients of the same broker, although the cross trading strategy may involve an investor who is not a regular client of the broker. Depending on the regulations governing the stock exchange where the securities are traded, this type of trading may not be permitted. Even in settings where cross-trading is considered an acceptable practice, there are usually some limitations on its use.
One of the problems that many financial experts have with cross trading is that the broker can choose not to trade on the exchange. Instead, the broker can use the buy order to offset 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 dual transaction, a fact that many investors and brokerage firms refrain from engaging in this type of activity.
Due to the potential difficulties 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 broker must be prepared to present evidence to the Securities and Exchange Commission as to why this type of transaction took place and what benefit both parties received from the deal. Unless both investors receive some benefit from the transaction, there is a good chance that the activity will not comply with the regulations set forth by the SEC.
A practice similar to cross trading 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, at the same time as receiving an order from a different client to sell that same stock at the same price. In some nations, the broker can simply merge the two, effectively creating an exchange between the two clients that allows each investor to receive what they want from the transaction. In other settings, the broker must appear on the exchange floor, declare the intention to buy the shares at the desired price, and ask if there are any objections. Otherwise, the broker proceeds to buy the shares and then offers them for the same price to the client. The broker benefits by charging transaction fees, and both investors benefit from fast execution of their orders.
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