Cross Trade

http://www.investopedia.com/terms/c/crosstrade.asp

 

What Does Cross Trade Mean?

A practice where buy and sell orders for the same stock are offset without recording the trade on the exchange, which is outlawed on most major stock exchanges. This also occurs when a broker executes both a buy and a sell for the same security from one client account to another where both accounts are managed by the same portfolio manager. 

 

Investopedia explains Cross Trade

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.

 

However, cross trades are permitted in very selective situations such as when both the buyer and the seller are clients of the same asset manager. The portfolio manager can effectively "swap out" a bond or other fixed income product from one client to another and eliminate the spreads on both the bid and ask side of the trade. The broker and manager must prove a fair market price for the transaction and record the trade as a cross for proper regulatory classification.

 

The key point is that the asset manager must be able to prove to the SEC that the trade was beneficial to both parties before executing a cross trade.

 

描述不是特别准确，国内股票交易是不允许cross trade，但是在HK，US都是允许cross trade的，只不过需要比较严格的前提，以及及时地向监管机构报告。象fixed income之类cross trading好像就更常见一些。

 

 

A cross trade is a trade effected by prior arrangement between buyer(s) and seller(s), on the basis of a dynamic reference price agreed upon by them in advance, through the agency of a third party acting in the capacity of broker or riskless principal and who impartially establishes the actual execution price.

 

From a business perspective, what distinguishes a “cross” from regular transaction is that the orders are matched at an externally-sourced price, by prior agreement. That is, a cross differs from an ordinary trade by the method of price agreement. A cross may involve an agreed trade among the broker’s clients (Client vs. Client) or between the broker’s own proprietary inventory and the client (Client vs. Firm).

 

Physical world example 1:

A broker has in hand at the same time a buyer and seller of XYZ stock, which happens to be listed on NYSE. Presuming the rules of the exchange permit such behaviour, he could say to each of the buyer and seller:

“XYZ is bid at 25, offered at 26 on the exchange. I am in touch with a buyer (seller) in the size you wish to sell (buy). Rather that introducing your orders to the exchange, I can facilitate a trade between you at the mid-point between the bid and offer, or $25.50. Shall I do that?”

 

If he obtains agreement from both, he will take the trade.

 

Physical world example 2:

The cross order may be submitted to an exchange, whose rules may apply and may affect how, or if, the cross is executed.

 

It is possible that a cross could be declined by the exchange. It’s also possible that the exchange could step into the middle of the proposed cross and trade some or all of one side, and leave the remainder of the other leg on the book, or cancel it.

 

For example, the book may appear as follows:

Bid		Offer
1000	$10.25	1000	$10.26
1000	$10.24	2000	$10.27
1000	$10.23	1000	$10.28

 

A client may want to buy a block of 100, 100 shares, and may agree to do it with the broker at $10.27, which is outside the exchange, but is still reasonable, especially considering the volume involved and its market impact. So the broker may send a cross for 100, 100 shares at $10.27 to the exchange. The exchange may respond by matching 1000 shares @10.26 and 2000 shares @$10.27 from the book with the client leg to buy, and then matching the remaining 97, 000 shares of the client leg to buy with 97, 000 of the broker’s leg to sell at $10.27, and then cancelling out the rest of the broker’s leg to sell.

 

 

 

The broker can send the cross order to exchange with “New Order Cross” message.

 

Note: Because the “New Order Cross” message is only supported in FIX 4.3 and later. Then we need to use at least FIX 4.3 protocol to support cross trade.

 

一个非常好的关于cross trade的讨论：http://www.fixprotocol.org/discuss/read/6725891a