Cross trading occurs when a stock broker sells a security from one of his customers to another, rather than trading a security on an exchange. This practice effectively creates an exchange between clients and opens the door for one or both parties not receive less than the best price for either portion of the transaction. Clearing firms are required to disclose cross trades on trade confirmations, however they are often coded and are not readily apparent to customers.
In theory, cross trades can benefit clients because it may enable a stockbroker to move securities between client accounts without exposing the securities to the stock market. In practice, however, cross trading is often an extremely improper practice, as brokers have duties to their client and must always seek to obtain the best execution for their buying and selling clients. It is the brokers duty to provide beneficial advise to both parties before executing a cross trade and this can be virtually impossible given the nature of these transactions.
Because of the potential issues with cross trading, many government and self -regulatory organizations have established rules that set forth when and how the cross trade may be utilized. For example, in the United States, a stockbroker must be prepared to present evidence to the Securities and Exchange Commission, on why this type of transaction took place, and what benefit both parties received from the transaction.
Typically, this is yet another way for a broker to rip you off. When the trade doesn’t get recorded through the exchange, there is a good chance that one client didn’t get the best price.
Fitapelli Kurta: Client Alert Cross Trading