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. Outside Broker

    The term outside broker has several applications in finance. ...
  2. Executing Broker

    An executing broker is a broker that processes a buy or sell ...
  3. Clearing Broker

    A clearing broker is a member of an exchange that acts as a liaison ...
  4. Broker

    1. An individual or firm that charges a fee or commission for ...
  5. Broker Association

    A broker association is a permitted association between exchange ...
  6. Brokered Market

    A brokered market involves agents or intermediaries in purchase ...
Related Articles
  1. Trading

    The Best Low-Cost, Web-Based Trading Brokers

    With this table, investors can differentiate between top low-cost, web-based trading brokers by price, capabilities, and offerings.
  2. Financial Advisor

    How Brokerage Fees Work

    What you need to know about fees when choosing between a full service and discount broker.
  3. Personal Finance

    Research Report Red Flags For Brokers

    Discover how to look past analysts' ratings to find winning stocks for your clients.
  4. Investing

    5 Misconceptions About Discount Brokers

    While discount brokers are the perfect choice for some investors, their business model could be detrimental to others.
  5. Trading

    Understanding order execution

    Find out the various ways in which a broker can fill an order, which can affect costs.
  6. Investing

    What Is a Broker-Dealer and Why Should You Care?

    Before deciding who to use for help with your investing, learn what brokers, dealers, and broker-dealers are and what services they provide.
  7. Financial Advisor

    Is a stockbroker career for you?

    Discover what you need to become a stockbroker and the variety of opportunities that are now available to you.
  8. Personal Finance

    The Role of a Prime Broker

    Understand the role of a prime brokerage, and learn about the services investment banks provide for hedge funds while in the role of being a prime broker.
RELATED FAQS
  1. Can you short sell stocks that are trading below $5? My broker says that I can't.

    Although it is not a requirement set by FINRA or the SEC, brokers will often tell investors that only stocks above $5 can ... Read Answer >>
Trading Center