Dual Trading

What Is Dual Trading?

Dual trading occurs when a broker places trades for both a client's and their own accounts at the same time. This practice can be illegal if certain conditions are not met, as per federal regulations.

Key Takeaways

  • Dual trading occurs when a broker places their own trade alongside a client's trade.
  • Dual trading can be ruled as front-running, which is illegal, if certain conditions aren't met.
  • Advocates of dual trading contend that market liquidity is enhanced, thus allowing the markets to function at peak efficiency.
  • Opponents say that banning dual trading would not affect market liquidity, and would eliminate unlawful trading by removing any conflicts of interest.

Understanding Dual Trading

Dual trading is when a broker simultaneously executes customer orders and places trades in their own account, or one in which they have a beneficial interest, as part of the same trade. This is also known as acting as both an agent and a dealer at the same time. Dual trading is prevalent in the futures market.

Dual trading is a very controversial issue. Proponents say that when brokers are able to trade in their own accounts as well as those of their customers, they contribute to market performance and liquidity because personal broker trades make up a large portion of the trading volume. On the other hand, opponents say that banning dual trading would not affect market liquidity, and would eliminate unlawful trading by removing any conflicts of interest.

Those who are in favor of dual trading argue that it is an important aspect of various markets and that dealer trades are often essential. They insist that trades by dealers are a major part of market activity on any given day. They also argue that the abuse of dual trading is more of a threat than a reality and that most brokers are able to do what is best for themselves and their clients without a conflict of interest.

Advocates of dual trading further contend that if brokers were restricted to only conducting either agent (transacting for customer accounts) or dealer (transacting for their own accounts) trades each day, then market activity would be greatly reduced, dampening liquidity and causing the markets to not function at their maximum efficiency, which would be harmful to the economy in general.

Dual trading has been happening in futures exchanges across the United States since organized futures markets got their start in the mid-1880s.

Regulation of Dual Trading

Under a dual trader/market-making system, market makers are permitted to execute transactions for customers and on personal accounts. With two sources of income to cover the costs of business (commissions and dealer/speculator profits), dual trader markets have greater numbers of market makers than comparable markets that don't allow dual trading. With more market makers, the level of competition for market-making increases, which raises market liquidity and lowers the costs of trading.

There are laws that regulate dual trading in the U.S. and many other countries. Certain conditions, most notably that the customer has to consent, must be met by the broker before they are legally permitted to engage in dual trading activity. Certain markets may be more open to dual trading, but opponents of the practice believe that it does not have any inherent benefits for a broker's clients or for the market in general.

Article Sources
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  1. Code of Federal Regulations. "Dual Trading." Accessed Nov. 16, 2021.

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