What Is an Out Trade?
An out trade is a trade that cannot be placed because it was received by an exchange containing conflicting information. The associated clearinghouse cannot settle the trade because the data submitted by parties on both sides of the transaction is inconsistent or contradictory.
- An out trade is a trade that can't be completed because the information sent by the parties of the trade to the clearinghouse is wrong or incomplete.
- When a clearinghouse encounters an out trade, it first gives the counterparties a chance to reconcile the discrepancy on their own.
- If the parties can resolve the matter, then they resubmit the trade to the clearinghouse.
- If the two parties cannot agree on the terms of the trade, then the matter is sent to the appropriate exchange committee for arbitration.
- Out trades are distinct from similarly-named trading strategies, such as "in and out trades" or "step-out trades."
How an Out Trade Works
A successful trade execution occurs when a buy or sell order is fulfilled. Typically, when an investor intends to buy a stock, they click on the buy button in their online brokerage account. Then, the order will be sent to their broker, who sends the order to an exchange, or the market maker, for execution.
Clearing is the process by which funds are transferred to the seller and securities to the buyer. Usually, a specialized organization, such as a clearinghouse, acts as an intermediary and reconciles orders between transacting parties. In this case, parties make transfers to the clearing organization, rather than to each party which whom they transact. Simply, clearing is the reconciling of purchases and sales of stocks and the direct transfer of funds from one financial institution to another.
Finally, settlement marks the official transfer of securities to the buyer's account and cash to the seller's account. For most trades, settlement takes place two days after the order is executed.
When reviewing the information that brokers provide to one another, a clearinghouse may become aware of the discrepancy between the trade data. This discrepancy may be in respect to price and/or quantity. When a clearinghouse encounters an out trade, it first gives the counterparties a chance to reconcile the discrepancy on their own. If the parties can resolve the matter, then they resubmit the trade to the clearinghouse. If the two parties cannot agree on the terms of the trade, then the matter is sent to the appropriate exchange committee so that the dispute settlement procedure of the exchange can be implemented.
Other Trading Terms
The term, “out trade” should not be confused with other terms for actual trading strategies, such as “in and out,” in which a single security is bought and sold multiple times during a short period. This is a speculative strategy that is used to take advantage of short-term pricing.
An out trade may also be confused with a “step-out trade,” a situation where several brokerage firms take part in executing a large order. When this happens, one brokerage firm generally assigns portions of the trade to the other brokers, along with a commission for their specified piece of the trade. Step-out trading may help to facilitate best execution and can be a good way to compensate various brokerages for their research and analysis activities.