DEFINITION of 'Interpositioning'

The unlawful practice of adding an extra broker/dealer as a principal on a trade, even if no service is provided. Typically, interpositioning is done as part of a mutual benefit strategy, sending commissions to the broker/dealer in exchange for referrals or other cash profit. This type of behavior occurs at the upper levels of trade between specialists and broker/dealers, hedge funds or other institutional accounts.

BREAKING DOWN 'Interpositioning'

Interpositioning violates the Investment Act of 1940, which states that a money manager cannot do anything that intentionally defrauds or deceives a client. A wide-ranging case of interpositioning was found to have occurred among various specialists of the New York Stock Exchange in the 1999-2003 period; the SEC estimated that more than $150 million in customer harm was caused in the form of higher commissions and spreads.