All about Cross Trade

Cross trading is when a trade in which the asset is purchased and sold is offset by the exchange without it being recorded. Most exchange platforms do not permit cross trading. Cross trading is legal if a broker matches buy and sell orders for the same security in two client accounts, and then reports the transactions as "cross trades" on the exchange.

Cross Trade Example

Let's take a look at an example to illustrate the concept of cross-trade. Let's say a client wishes to sell a security and another wants it to be bought. The broker can match the orders, without having to send them back to the stock exchange. Both orders can be filled in cross trade. Transactions can be reported promptly with the price and time stamp. Cross-trading must be legal at the price that corresponds to the security's current market price.

What are Cross Trades Permitted?

Cross trades are generally not allowed on major stock exchanges. Orders must be sent directly to the exchange in order to record the trade. Cross trades are allowed in certain situations. Cross trades are allowed when the buyer and seller are under the same asset manager. Cross trades may also be allowed if the price of the item is competitive at the time the trade is being made.

Portfolio managers can move assets from one client to another without difficulty so that they can reduce spread. The broker and the manager must both prove the fair market price of the transaction. They then need to record the trade as "cross trade" in order to comply with the legal regulatory classification. The asset manager must prove that cross-trades were beneficial for both parties.

Cross trades may be subject to certain conditions, such as the following:

- Brokers who transfer assets between clients' accounts need not report the transaction to any exchange.

Cross trades are allowed for hedge derivative trades

Cross trading can be done for block orders.

For whom is cross trading?

We now know what cross trade is and who the best candidate is for it. Cross-trade investors don't have to indicate a price to complete the transaction. However, a broker can only match an order if she has both buy and sell orders from the same investors.

These trades are allowed depending on the SEBI regulations. This type of trade is more applicable to investors who trade highly volatile securities. Because the security's value can change rapidly in a short period of time, this is why it may be more relevant to investors who trade highly volatile securities.

The Pitfalls of Cross Trading

Cross trading has its own pitfalls. They are most problematic because of poor reporting. If a trade is not recorded on the exchange, one or both clients might not be able buy or sell at the current market price that is available to cross trade traders. Cross-trade orders are not publicly listed by default so investors might not be aware of a lower price.

Cross trading is also controversial because they can undermine trust in a market. Cross trades can technically be legal even though other market participants do not have the opportunity to participate in them. Some market participants might have wanted to participate in certain of these trades, but they were not allowed to because the trade was conducted off the publicly traded exchange. This makes the transaction somewhat unfair.

Last, multiple cross trades can be used in order to create the appearance of substantial trading activity that could eventually impact the security's price. This is known as "painting the tape", a manipulative technique to alter the market price for a security through illegitimate means.

Conclusion

Cross trading can have a negative connotation if it is not done properly. However, cross trading can be extremely helpful for investors who want to trade volatile securities. Cross trading should be done responsibly and with no legal consequences.