Market participants must understand the cross-trade meaning, which many exchanges do not allow, but multi-national brokers and asset managers frequently conduct, following legal requirements and satisfying regulatory classifications.
A cross-trader refers to a buy and a sell order in the same asset at the same price, a frequent condition at brokers and asset managers with millions of orders. While cross-trading has a negative reputation and remains banned in some countries due to the possibility of misuse, cross-trading, if executed according to rules and regulations, can improve pricing, and increase order execution speed, especially in volatile markets.
Brokers and asset managers are legally permitted to conduct cross-trading, and most retail orders remain filled via a cross-trade. Proof to the exchange, the regulator, or both must exist to confirm the price benefited both parties.
The Cross Trading Definition
The cross-trading meaning applies when a broker or asset manager has one client who places a buy order and one client who places a sell order in the same asset at the same price.
What does cross-trading mean?
Cross trading means that the order placement occurred off-exchange, and no record exists. The broker or asset managed filled it from its internal order book, swapping them between clients, skipping the spread, lowering costs, and increasing order execution.
How Does a Market Participant Place a Cross-Trade?
Before meeting the cross-trade definition, a broker or asset manager must fulfill a few requirements.
- One client seeking to buy an asset at a set price
- Another client willing to sell the same asset at the same price
- Matching order volumes
- An automated system matching orders, timestamping them, recording the cross-order price, and providing proof it was either identical or better than the open market price
The automated system will scan the internal order book and match client orders whenever possible, filling them off-exchange and routing access orders to the market or exchange. It is common for brokers to conduct cross-trading if they follow the legal and regulatory rules. While cross-trading can occur on market orders, they primarily apply for pending orders, filled as large block orders, and during volatile markets.
A Cross-Trade Example
Assume a broker has one client who places a buy order of 5,000 shares in company ABC at $25 and another who places a sell order for 5,000 shares in company ABC at $25. Rather than sending both orders to the exchange, the broker fills them internally, satisfying both clients.
The automated system timestamps both orders with the price. It provides proof to the exchange that both clients received equal or better pricing than the exchange price at the transaction time and complies with regulatory classifications, resulting in a legal transaction.
The cross-trade results in a low-latency transaction, and brokers who report pricing improvements over the order price will often accomplish it via cross-trading, an essential component for scalpers, high-frequency, algorithmic, and demanding day traders, especially in volatile markets.
Is Cross Trading Legal? Why Cross-Trade Orders Have a Negative Reputation
Debating the “what is cross-trade” benefits and its drawbacks remains a complex issue with fewer proponents than opponents. Most of the negative reputation comes from misinformation campaigns and a few bad actors in the brokerage industry taking advantage of it and defrauding millions of traders. CySEC-regulated brokers engaged heavily in cross-trading without transparently notifying clients and without the necessary proof to inform exchanges of fair pricing.
Cross-trading is legal for brokers and asset managers if they follow legal and regulatory rules. Providing proof that the price was equal to or better than the open market price remains one crucial requirement to eliminate scrutiny for off-exchange order filling.
Who Conducts Cross Trading?
Brokers and asset managers with substantial order flow conduct cross-trading. Many retail traders and industry professionals give the “what is cross-trade” debate a negative connotation, an unfair assessment from the group pushing for commission-free trading, which results in higher costs. A similar misunderstanding applies to cross-trading, which can lower trading costs and accelerate order execution in volatile markets.
Despite the negative bias towards cross trading, it fulfills a crucial role, especially for brokers and asset managers who move large block orders. Almost every broker conducts cross-trading, as it offsets internal order flows from clients. It can lower transaction costs and speed up order execution, as brokers do not route orders to the open market but fill them from their internal order book.
Since cross trading is off-exchange and unofficial, opponents argue that neither side is aware of superior pricing. Cross-trading remains prone to manipulation and misconduct, but if executed per legal and regulatory requirements and classifications, the downside does not apply. Some countries ban cross-trading, and few traders actively seek it, but it can increase profitability, especially in highly volatile markets. Most retail orders remain cross-trade orders by retail brokers using sophisticated algorithms for low latency execution, despite arguments to the contrary and attempts to decrease it.
How do you identify a cross-trade?
The broker or asset manager must provide evidence to the exchange that the cross-trade offered beneficial pricing to both parties. It includes showing that the execution price was equal to or better than the fair market price, following correct legal and regulatory requirements and classifications.
How do I cross-trade crypto?
The trader must buy and sell the same asset simultaneously. It will show on the exchange blockchain as one data point rather than two.
What is the purpose of a cross-trade?
A cross-trade can result in low-latency order execution and better pricing if executed per legal and regulatory requirements. The broker or asset manager can offset opposing orders in the same asset from its internal order book and does not have to report the transaction to the exchange.
What are cross orders in trading?
Cross orders refer to buy and sell orders in the same asset at the same price. The transactions offset each other and reporting it to the exchange as an official order is unnecessary.