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Crossed trades are buying and selling activities that are conducted without recording transactions related to the process of trading the securities involved. In most cases, the sale and purchase will involve a single security that is held by two investors. It is also highly likely that the two investors utilize the same broker to arrange the sale and purchase activity.
The use of a crossed trade is not available in many markets around the world. Governmental regulations in a number of countries prohibit the use of the crossed trade. In some cases, legislation was enacted to prevent a small number of unscrupulous brokers from failing to obtain the best price for each client involved in the trading. Other countries chose to impose a ban on the crossed trade as the practice has the potential to create loopholes in tax laws and thus could be used to get around paying an equitable amount of taxes on the investments involved.
In countries where a crossed trade is possible, there are usually procedures in place to ensure that both investors receive a fair market price in the transaction. This involves nullifying the bid and ask spreads from the transaction and essentially agreeing to a swap of assets. While not recorded as a trade, the transaction is recorded as a cross, providing both a record of the event and complying with regulations that govern the practice.
A crossed trade circumvents any exchange where the security is actively traded, since the trade takes place between the two investor accounts. Creating and executing a crossed trade requires the participation of two investors, the broker, and the program manager at the brokerage house that manages the accounts for the two investors. With the agreement of all parties concerned, it is possible to buy and sell orders using this approach.
The use of a crossed trade is heavily monitored in countries where the practice is allowed. One country that does allow the use of a crossed trade is the United States. Due to regulations put in place by the Securities and Exchange Commission, any broker or program manager who wishes to conduct a crossed trade must be able to prove the trade is advantageous for both investors. If the trade cannot be proven as beneficial to both parties, then the crossed trade cannot take place.
A crossed trade may be helpful in helping investors change to a position using the same security that each considers to be more in keeping with their investing strategy. As long as each client obtains the best price possible and is happy with the trade, the activity usually meets any regulations that may govern this type of transaction.