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. Front Running

    The unethical practice of a broker trading an equity based on ...
  3. Jitney

    A situation in which one broker who has direct access to a stock ...
  4. Guilt-Edged Investment

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

    A scheme that attempts to boost the price of a stock through ...
  6. Bucketing

    A situation where, in an attempt to make a short-term profit, ...
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. When trading in financial markets, higher returns are generally associated with higher risk. Hedge your risk with interest rate swaps.
    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.
  5. ISDA Master Agreement
    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 ...
  6. 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.
  7. Fundamental Analysis

    Derivatives 101

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

    The Barnyard Basics Of Derivatives

    This tale of a fictional chicken farm is a great way to learn how derivatives work in the market.
  9. Bonds & Fixed Income

    A Guide To Real Estate Derivatives

    These instruments provide exposure to the real estate market without having to buy and sell property.
  10. Forex Education

    America's Loss Is The Currency Market's Gain

    The Smithsonian Agreement hurt the U.S. in the short-term, but was necessary in furthering real market-driven exchange rates.

You May Also Like

Hot Definitions
  1. Christmas Tree

    An options trading strategy that is generally achieved by purchasing one call option and selling two other call options at ...
  2. Christmas Club

    A short-term savings account that usually pays out the full account balance to its account holders once each year, right ...
  3. Boston Snow Indicator

    A market theory that states that a white Christmas in Boston will result in rising stock prices for the following year. For ...
  4. Christmas Island Dollar

    The former currency of Christmas Island, an Australian island in the Indian Ocean that was discovered on December 25, 1643. ...
  5. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  6. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
Trading Center