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.

RELATED TERMS
  1. Hard Dollars

    Hard dollars are fees paid for transacting and research by clients ...
  2. Settlement Period

    A settlement period is the time between the settlement date and ...
  3. Last Trading Day

    The last trading day is the final day that a futures contract ...
  4. Firm Order

    A firm order may be referred to as an order for a trade from ...
  5. Block House

    A brokerage firm with the primary focus of locating potential ...
  6. Cash Trading

    Cash trading is a method of buying or selling securities by providing ...
Related Articles
  1. Investing

    Fidelity Investments Makes the Case for Banking at a Brokerage

    Forget banks – Fidelity offered up some reasons to conduct financial transactions at your brokerage.
  2. Investing

    Charles Schwab Poised for Earnings Beat: Zacks

    Charles Schwab reports first quarter results Monday, and Zacks thinks the brokerage can post upside.
  3. Investing

    The Complete Guide to Choosing an Online Stock Broker

    Online stock brokers have made high-risk, high-reward investing available to the broader public.
  4. Trading

    Principal trading and agency trading

    Ever wonder what happens behind the scenes when you buy or sell a stock? Read on to find out.
  5. Investing

    Discount Brokerage Earnings Are In: The Best, the Good and the Meh

    The top three discount brokerages weighed in with first quarter earnings, with Schwab and E*TRADE getting rewarded and TD Ameritrade stock falling.
  6. Trading

    Guide to Pairs Trading

    Pairs traders go long on an under-performer while simultaneously going short on the over-performer.
  7. Trading

    Introduction to Margin Accounts

    Find out what your broker is doing with your securities when you invest on margin.
  8. Investing

    Analyst Recommendations: Do Sell Ratings Exist?

    Analyst reports can be an investor's best friend - but without knowing how to read them, you won't be able to fully utilize them.
  9. Investing

    E*TRADE Earnings Estimates Move Higher on Back of Strong Q1

    E*TRADE's strong showing in the first quarter has led to upward earnings estimate revisions for the rest of this year and 2019.
  10. Trading

    Range Trade Forex With Non-U.S. Dollar Pairs

    If you are following a range-trading strategy, you're better off with pairs that do not include the U.S. dollar. Find out why.
RELATED FAQS
  1. Can you short sell stocks that are trading below $5? My broker says that I can't.

    Short selling can be very risky for both the investor and the broker. Brokers will often tell investors that only stocks ... Read Answer >>
  2. What Happens When Borrowed Short Shares Are Sold?

    In a short-sale transaction, shares are borrowed from the lender and sold in the market. Read Answer >>
Hot Definitions
  1. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  2. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  3. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  4. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  5. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  6. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
Trading Center