What is a 'Cross Trade'

A cross trade is a practice where buy and sell orders for the same asset are offset without recording the trade on the exchange, an activity that is not permitted on most major exchanges. A cross trade also occurs when a broker executes buy and a sell orders for the same security across different client accounts. For example, if one client wants to sell and another wants to buy, the broker could match those two orders without sending the orders to the stock exchange to be filled.

Breaking Down the 'Cross Trade'

Cross trades have inherent pitfalls due to the lack of proper reporting involved. When the trade doesn't get recorded through the exchange one or both clients may not get the current market price that is available to other (non-cross trade) market participants. Since the orders are never listed publicly, the investors may not be made aware as to whether a better price may have been available. Cross trades are typically not allowed on major exchanges. Orders need to be sent to the exchange and all trades must be recorded.

However, cross trades are permitted in select situations, such as when both the buyer and the seller are clients of the same asset manager and the price of the cross trade is considered to be competitive at the time of the trade.

Permitted Cross Trades

A portfolio manager can effectively move one client's asset to another client that wants it and eliminate the spread on 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 asset manager must be able to prove to the Securities and Exchange Commission (SEC) that the trade was beneficial to both parties.

Cross Trades and Matching Orders

While a cross trade does not require each investor to specify a price for the transaction to proceed, matching orders occur when a broker receives a buy and sell order from two different investors both listing the same price. Depending on local regulations, trades of this nature may be allowed, since each investor has expressed an interest in completing a transaction at the specified price point. This may be more relevant for investors trading highly volatile securities where the value may shift dramatically in a short period of time.

Cross trades are controversial because they may undermine trust in the market. While some cross trades are technically legal, other market participants were not given the opportunity to interact with those orders. Another market participants may have wanted to interact with one of those orders, but was not given the chance because the trade occurred off the exchange.

RELATED TERMS
  1. Opening Cross

    Opening cross is a method used by Nasdaq to determine the opening ...
  2. Cross Currency

    A cross currency is a currency rate that is quoted and transacted ...
  3. Agency Cross

    An agency cross is a transaction in which an investment adviser ...
  4. Global Crossing

    Global Crossing is a company that filed for bankruptcy protection ...
  5. Crossed Market

    A crossed market is a situation arising when the bid price of ...
  6. Cross Hedge

    A cross hedge is used to manage risk by investing in two positively ...
Related Articles
  1. Trading

    Make The Currency Cross Your Boss

    Tap into a world of possibilities by going beyond the simple pro- or anti-dollar trade.
  2. Investing

    The Opening Cross: How Nasdaq Stock Prices Are Set

    Learn how the opening cross auction process determines prices of Nasdaq-listed securities at market open to ensure liquidity by matching buyers or sellers.
  3. Tech

    Bitcoin Extremely Close to 'Death Cross' Chart Pattern

    Chart analysts are increasingly scrutinizing bitcoin, and they're finding a strong bearish signal.
  4. Investing

    The Foreign Exchange Interbank Market

    Learn how the forex interbank market functions and effects individual investors.
  5. Investing

    Calculating Cross Elasticity of Demand

    Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.
  6. Investing

    Understanding Market Orders And Limit Orders

    A market order executes a transaction as quickly as possible at the present price. Immediacy is the main concern. A limit order is executed at or below a purchase or sale price. Price is the ...
  7. Trading

    These Are the Best Hours to Trade the Euro

    Six popular currency pairs and numerous secondary crosses offer euro traders a wide variety of short- and long-term opportunities.
RELATED FAQS
  1. The difference between a market order and limit order

    Market orders execute a trade to buy or sell immediately at the best available price. A limit order only trades when the ... Read Answer >>
  2. What exactly is being done when shares are bought and sold?

    Most stocks are traded on physical or virtual exchanges. The New York Stock Exchange (NYSE), for example, is a physical exchange ... Read Answer >>
  3. How long does it take a broker to confirm a trade after it is placed?

    Learn about placing trades with a broker and the amount of time required to received confirmation of different types of orders. Read Answer >>
  4. How can I be paying more than what a stock is trading for?

    It might seem logical that the last traded price of a security is the price at which it would currently be trading, but this ... Read Answer >>
Trading Center