DEFINITION of Pairing Off
Pairing off is the illegal practice between brokerage companies where short and long positions are fictitiously bought and sold. The trades between the firms are settled in cash, rather than actual delivery of securities, so the actual trade never really occurs. The intent of paring off is to manipulate the market.
BREAKING DOWN Pairing Off
Pairing off can occur only by brokerage firms colluding with one another. Proper settlement of short and long positions require the delivery of physical securities be made within three business days after the transaction. By settling these trades with cash payments, the brokerage firms are able to manipulate the market by trading non-existent shares and circumventing settlement regulations.
Example of Pairing Off
Broker 1 enters a trade to sell 1000 shares of stock ABC to Broker 2 at a price of $10. Simultaneously, Broker 2 enters a trade to sell 1000 shares of stock ABC to Broker 1 for $8. Rather than deliver the actual securities to their counterpart, Broker 1 and Broker 2 settle in cash, with Broker 1 paying Broker 2 $200 instead of executing the actual transaction. The intent of this type of trade is to give the impression of greater demand for a security than there is in reality. Broker 1 and Broker 2 have colluded to manipulate the market for stock ABC, a clearly illegal practice.