What is Pairoff
A pairoff is a purchase of securities to offset a previously transacted sale of the same security. Another meaning for the term is a transaction in securities markets where off-setting buy and sell trades are settled in cash, based on the difference in the prices between the off-setting trades. No securities trade hands; instead the settlement difference between the trades is calculated, and a money wire is sent to the appropriate party.
BREAKING DOWN Pairoff
The offsetting position of a pairoff is usually transacted within the same day of the original purchase. This is also referred to as crystallization. In the case of matching trades, a pairoff can reduce settlement risks and security wire transfer fees. It is ultimately a form of speculation.
As an example of a pairoff in action, consider Brokerage XYZ that agrees to sell 100 shares of Company 123 to Brokerage ABC for $15,000. Simultaneously, Brokerage ABC agrees to sell 100 shares of Company 123 to Brokerage XYZ for $16,000. The difference between the two trades is $1,000.
Instead of actually trading the securities and transferring those shares to their respective accounts, the two brokerage firms pair off. In this case, Brokerage XYZ gives Brokerage ABC $1,000 instead of doing the actual transaction. By settling directly with each other, the two parties to a pairoff trade save money on costs associated with completing the trade and transaction.
How a Pairoff Works
When a pair-off instruction is sent, the settlement instructions for the pair-off cash wire must be included. The pair-off closes or draws down the amount of the open trade by the paired-off amount and only the associated gain or loss is moved. There can be partial and multiple pair-offs. In a partial pair-off, only part of the trade is paired-off, while the other part is either allocated into specified pools or paired off later against the remaining open trade amount. The pairing-off and allocation process can occur at different intervals and over different days.
Pairoffs vs. Multiway Pairoff Transactions
A multiway pairoff transaction can be used for all investment types, except currency and swap investments. Multiway pairoffs allow a trader to partially or completely pair off multiple long and short tax lots. Closing occurs on the trade date of the multiway pairoff transaction. Gains realized from a short position are classified as short-term; gains realized from a long position will be short-term or long-term, depending on the periods defined in the country/tax matrix of the investment's issue country.