A cross trade is a practice where a broker buys and sells the same stock at the same price for security are offset without recording the trade on the exchange. That means the broker simultaneously makes trade between two separate customers at that price. It is not permitted on most of the exchanges.
Another variant of this is the market opening and closing crosses. Cross is also used with regard to securities trades and refers to a type of foreign exchange trade. The NASDAQ collects data on all buy and sell interests within the two minutes before its opening this information collected is referred to as the opening cross.
Traders can post orders to buy at the opening price or to buy if there is an order imbalance. This dissemination of pricing interest helps to limit disruptions in liquidity.
The closing cross on NASDAQ matches bids; it presents a given stock to create the final price of the day. Traders can place orders that can either be ""market at the close"" or ""limit at the close."" Here, the former means to buy or sell at the official closing price.
A cross trade can also be done legitimately when a broker trades matched buy and sell orders for the same security across different clients and reports them on an exchange. The cross trades must be executed at a price that corresponds to the prevailing market prices. Cross trades are allowed when brokers are trading clients’ assets between accounts, for derivatives trade hedges, and certain block orders.
You must know the following regarding a cross:
- The broker and manager must prove that the price quoted is a fair market price for the transaction record the cross trade for proper regulatory classification.
- The asset manager should prove to the securities and exchange commission (SEC) that the trade was beneficial to both the selling and buying parties.
- It is a portfolio manager who can effectively move one client’s asset to another and eliminate the spread of the cross-trade.
- This practice is more relevant for investors trading in highly volatile securities where the value shifts drastically.