DEFINITION of 'Step-Out Trading'

The execution of a large order by several brokerage firms that are each assigned portions of the trade by another brokerage firm. In step-out trading, each brokerage receives credits or commissions for the share of the trade that it executes. Although different brokerages are executing different blocks of the trade, each block will be executed at the same price. Step-out trading can also refer to an order that is executed entirely by one brokerage that simply gives credits or commissions to other firms for portions of the trade, which it might do if those firms provided research and analysis.

BREAKING DOWN 'Step-Out Trading'

Step-out trading typically involves trades placed by investment advisers on behalf of their clients. The SEC has raised concerns that step-out trades may not result in best execution, which brokers are legally required to provide, and may have disclosure issues. Rule 10b-10 provides some protection against these potential problems by requiring the different brokerages participating in the step-out transaction to provide certain material information about the trade in their trade confirmations. On the other hand, step-out trading can also facilitate best execution and can be a good way to compensate different brokerages for their research and analysis activities.

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