What is Cross?
Cross trades involve offsetting buy and sell orders for the same security between different client accounts without going through the main exchange. While generally prohibited on major exchanges to prevent manipulation, there are legitimate exceptions.
Brokers can execute cross trades when they have matching buy and sell orders at a fair price. This means finding clients who want to buy and sell the same security at a price that reflects the current market value. The broker then facilitates the trade without involving the exchange but reports it promptly with accurate timestamps and pricing.
How Cross Trade Works
The hidden nature of cross-trades raises some concerns. Because they bypass the exchange, there's no public record to guarantee clients receive the best possible price. Without transparency, investors may be unaware of potentially better deals on the open market. This lack of oversight is why most major exchanges restrict cross-trades entirely.
However, there are some permitted exceptions. In specific situations, a broker can facilitate a cross-trade between two clients of the same asset manager as long as certain conditions are met:
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Client knowledge and consent: Both parties must be informed and agree to the cross-trade.
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Competitive pricing: The trade price must be demonstrably fair and in line with the current market price.
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Transparent reporting: The broker must promptly report the cross-trade to the exchange, including timestamps reflecting the exact execution time and price.
In these scenarios, the portfolio manager essentially acts as a matchmaker, directly connecting a buyer and seller within their client base. This eliminates the typical exchange spread (difference between buy and sell price) for the trade. However, the burden falls on the broker and manager to prove a fair market price and ensure proper reporting for regulatory purposes.