Cross

A securities transaction in which the same broker acts as agent on both sides of the trade. The practice, called 'crossing,' is legal only if the broker first offers the securities publicly at a price higher than the bid.
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Definition

A cross, also known as a cross trade, is a type of securities transaction where the same broker acts as an agent for both the buyer and the seller in a single trade. This practice is known as crossing and is permissible only under specific conditions, including publicly offering the securities at a price higher than the bid first. This ensures market transparency and fairness, preventing manipulation or unfair pricing.

Examples

  1. Institutional Crossing: A large investment fund wants to sell a substantial amount of stock. Rather than conducting multiple trades on the open market, which could significantly impact the stock’s price, the broker finds a buyer within their client base and matches the orders internally.
  2. Mutual Fund Transactions: A mutual fund wanting to rebalance its portfolio might request its broker to sell certain securities. The broker then finds another investor within their own client base to purchase these securities at a mutually agreed-upon price.

Frequently Asked Questions

Yes, cross trades are legal if conducted under regulatory guidelines, specifically ensuring that securities are publicly offered at a higher price than the bid to maintain market integrity.

Why do brokers perform cross trades?

Cross trades may be performed to minimize market impact, reduce transaction costs, and expedite large-volume trades while ensuring fair execution prices for both parties.

What benefits do cross trades offer?

Benefits include reduced market impact, potentially lower costs due to fewer commissions or spreads, and the ability to execute large orders without significantly altering the security’s market price.

Are there any drawbacks to cross trading?

Potential drawbacks include diminished market transparency if not properly disclosed and the risk of conflicts of interest if a broker does not act in the best interests of both parties.

How is crossing regulated?

Crossing is regulated by financial authorities such as the SEC (Securities and Exchange Commission) in the United States, with stringent rules to prevent market manipulation and to protect investors’ interests.

  • Market Order: An order to buy or sell a security immediately at the best available current price.
  • Limit Order: An order to buy or sell a security at a specified price or better.
  • Arbitrage: Simultaneously buying and selling an asset in different markets to exploit price differences.
  • Bid-Ask Spread: The difference between the asking price and the bidding price of an asset.
  • Insider Trading: The illegal practice of trading on the stock exchange to one’s own advantage through having access to confidential information.

Online References

Suggested Books for Further Studies

  • “The World of Securities Regulation” by Joel Seligman
  • “Securities Regulation: Cases and Materials” by James D. Cox
  • “Law of Securities Regulation” by Thomas Lee Hazen

Fundamentals of Cross Trading: Finance Basics Quiz

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