Cross Trade

AAA

DEFINITION of 'Cross Trade'

A practice where buy and sell orders for the same stock are offset without recording the trade on the exchange, which is outlawed on most major stock exchanges. This also occurs when a broker executes both a buy and a sell for the same security from one client account to another where both accounts are managed by the same portfolio manager.

INVESTOPEDIA EXPLAINS 'Cross Trade'

Typically, this is yet another way for a broker to rip you off. When the trade doesn't get recorded through the exchange, there is a good chance that one client didn't get the best price.

However, cross trades are permitted in very selective situations such as when both the buyer and the seller are clients of the same asset manager. The portfolio manager can effectively "swap out" a bond or other fixed income product from one client to another and eliminate the spreads on both the bid and ask side of the trade. The broker and manager must prove a fair market price for the transaction and record the trade as a cross for proper regulatory classification.

The key point is that the asset manager must be able to prove to the SEC that the trade was beneficial to both parties before executing a cross trade.

RELATED TERMS
  1. Blind Brokering

    When brokerage firms ensure anonymity to both the buyer and the ...
  2. Guilt-Edged Investment

    An unethical investment that generates profits for the investor. ...
  3. Pump And Dump

    A scheme that attempts to boost the price of a stock through ...
  4. Jitney

    A situation in which one broker who has direct access to a ...
  5. Cross

    When a broker receives a buy and sell order for the same stock ...
  6. Front Running

    The unethical practice of a broker trading an equity based on ...
RELATED FAQS
  1. What are interest rate swaps on the OTC market?

    Interest rate swaps are agreements where counter parties agree to exchange interest rate cash flows based upon the difference ... Read Full Answer >>
  2. What are the Securities and Exchange Commission regulations regarding swaps?

    The U.S. Securities and Exchange Commission (SEC) was granted the authority to regulate security-based swaps (SBS) by Title ... Read Full Answer >>
  3. What would motivate an entity to enter into a swap agreement?

    The main purpose of swap agreements is to swap cash flows between counterparties for a certain market or asset. Generally, ... Read Full Answer >>
  4. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  5. What is the difference between LIBOR, LIBID and LIMEAN?

    LIBOR, LIBID and LIMEAN are all reference rates used to benchmark short-term interest rates. The London Interbank Offered ... Read Full Answer >>
  6. How do you use a back-to-back loan?

    Back-to-back loans or parallel loans are a financial move used by companies to curb foreign exchange rate risk or currency ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Shopping For A Financial Advisor

    Finding your perfect advisor is as simple as shopping for a car. Read on to learn more.
  2. Personal Finance

    4 Dishonest Broker Tactics And How To Avoid Them

    Protecting yourself from unscrupulous practices means knowing how to spot them.
  3. Options & Futures

    Brokers and Online Trading

    How do you find the right broker for your investment needs? Start by reading our broker tutorial.
  4. Economics

    Effects of OIS Discounting for Derivative Traders

    The use of OIS discounting has important implications for derivative valuations and could positively or negatively impact a trader's profit or loss.
  5. Investing

    How Swaptions Can Reduce Risk in Portfolios

    How can investing in Swaptions reduce risk in portfolios.
  6. Investing

    What Warren Buffet Calls "Weapons of Mass Destruction": Understanding the Swap Industry

    A full analysis of how the swap industry works.
  7. Investing Basics

    How Are Interest Rate Swaps Valued?

    When trading in financial markets, higher returns are generally associated with higher risk. Hedge your risk with interest rate swaps.
  8. Investing Basics

    ISDA Master Agreement

    The ISDA Master Agreement is a document outlining the terms of an over-the-counter derivatives transaction between two parties. This document serves as a standard agreement in these transactions ...
  9. Insurance

    Credit Default Swaps: What Happens In A Credit Event?

    The credit crisis of 2008 prompted important changes to the settlement of credit default swaps.
  10. Fundamental Analysis

    Derivatives 101

    Learn how to use this type of investment as an alternative way to participate in the market.

You May Also Like

Hot Definitions
  1. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  2. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  3. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  4. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  5. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  6. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
Trading Center