What Is a Cross?
The term "cross" has three primary definitions in finance:
- The first type of cross is when a broker receives a buy and sell order for the same stock at the same price, and subsequently makes a simultaneous trade between two separate customers at that price. Variations of this are the market opening and market closing crosses.
- The second type of cross is a foreign exchange (forex) transaction in which the non-U.S. currencies being traded are exchanged directly for each other instead of first being converted to U.S. dollars.
- A cross may also refer to a technical analysis chart pattern, such as a golden cross or death cross.
- The term "cross" is used in several ways in finance, the most common being when a broker executes a transaction on a trading floor or exchange.
- In forex markets, a cross trade involves two non-U.S. dollar currency exchange transactions.
- In technical analysis, golden crosses and death crosses are commonly identified chart patterns indicating a trend confirmation.
Crossing by a Broker
If a stockbroker receives separate orders to buy and sell at the same price at the same time, he must offer the stock in the market at a higher price than the bid. If no higher bid is available, he can execute the two deals at the same time and at the same price.
Opening and Closing Crosses
The Nasdaq gathers and posts data on all buy and sell interest in the two minutes prior to its opening; this information is referred to as the opening cross. Traders can post orders to buy at the opening price or to buy if there is an order imbalance. This dissemination of pricing interest helps to limit disruptions in liquidity.
The closing cross on Nasdaq matches bids and offers in a given stock to create a final price of the day. Traders can place orders that can be either "market at close," which means buy or sell at the official closing price or "limit at close." In the latter case, if the price at the close is better than the specified limit, the deal will be executed at the market price. Nasdaq collects data for the closing cross between 3:50 p.m. and the closing time of 4:00 p.m. Cross orders are executed between 4:00 p.m. exactly and five seconds after 4:00 p.m.
The U.S. dollar (USD) is the most actively traded currency in the multi-trillion-dollar daily foreign exchange market. In the past, investors or hedgers who wanted to trade a pair such as the euro vs. the yen, known as EUR/JPY, needed to do it through the dollar.
- buy EUR and sell USD and
- buy the same amount of USD and sell JPY. Disadvantages of this approach include paying the bid/offer spread twice (once in each currency pair) and needing to deal for a USD amount rather than a EUR or JPY amount.
However, the dollar pairs are more actively traded than the cross, so in times of volatility or reduced liquidity, traders may still execute via the components.
Golden Crosses and. Death Crosses
Technical analysis involves the use of statistical analysis to make trading decisions. Technical analysts use a ton of data, often in the form of charts, to analyze stocks and markets. Technical traders learn to recognize these common patterns and what they might portend for the future performance of a stock or market.
A golden cross and a death cross are exact opposites. A golden cross indicates a long-term bull market going forward, while a death cross signals a long-term bear market. Both refer to the solid confirmation of a long-term trend by the occurrence of a short-term moving average crossing over a major long-term moving average. Either cross may occur as a signal of a trend change, but they more frequently occur as a strong confirmation of a change in trend that has already taken place.