Pre-Arranged Trading


DEFINITION of 'Pre-Arranged Trading'

The buying and selling of futures, options or commodities that occurs between brokers or dealers at an agreed upon price. The practice of pre-arranged trading is illegal under the Commodity Exchange Act and Commodity Futures Trading Commission (CFTC) because it can create an unfair market for other brokers, traders and investors.

For example, two commodity dealers may use pre-arranged trading to execute risk-free trades at set prices rather than at market prices, thereby limiting risk, gaining tax advantages and limiting the market for other participants.

BREAKING DOWN 'Pre-Arranged Trading'

Pre-arranged trades are trades where an offer to sell is coupled with an offer to buy back, or where an offer to buy back is coupled with an offer to sell, at the same price or some other pre-arranged price that benefits the dealers or brokers engaging in the pre-arranged trading. These types of trades are prohibited because they are not exposed to the market risks that other investors would endure. In order for trades to be at the risk of the market, the first transaction (such as a buy order) must be made with no guarantee or assurance of the price of the second transaction (for example, the sell order). NYSE Rule 78 specifies that "An offer to sell coupled with an offer to buy back at the same or at an advanced price, or the reverse, is a pre-arranged trade and is prohibited. This rule applies both to transactions in the unit of trading and in lesser and greater amounts."

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