A CROSS securities transaction is a type of trade in which the same broker acts as an agent for both the buyer and the seller. This practice, known as “crossing,” is legal with specific conditions. To ensure fairness and transparency, the broker must first offer the securities publicly at a price higher than the current bid before finalizing the cross transaction. This practice ensures that market participants have an opportunity to trade at better prices and that the transaction is executed in a manner that upholds market integrity.
Legal and Regulatory Considerations
Legal Requirements
For a CROSS transaction to be legal:
- Market Exposure: The broker must expose the transaction to the open market at a price better than the bid.
- Regulatory Compliance: Compliance with the rules and regulations set by governing bodies such as the Securities and Exchange Commission (SEC) or equivalent authorities is mandatory.
- Transparency and Fairness: There must be no conflict of interest, and the broker should maintain a transparent process throughout the transaction.
Historical Context
CROSS transactions have evolved with the development of securities markets. Initially, they were designed to facilitate efficient trading, especially in less liquid markets. Over time, regulatory frameworks have adapted to ensure these deals do not harm market integrity.
Types of CROSS Transactions
Internal Cross
An internal cross occurs when the broker matches buy and sell orders within the same brokerage house. The regulatory requirement is the public exposure to ensure other market participants have the opportunity to match or better the bid.
External Cross
In an external cross, the broker may interact with another brokerage to fulfill the buy and sell orders. Even in this scenario, the transaction must be first exposed to the market to meet legal standards.
Example of a CROSS Transaction
Suppose Broker A has a client willing to sell 1,000 shares of Company X at $50 each and another client willing to buy those shares. Broker A must first offer these shares publicly at a price higher than the bid, say $50.50. If no better price is achieved, Broker A can then match the buy and sell orders internally.
Applicability
CROSS transactions are applicable in various scenarios:
- Minimizing Market Impact: Useful in trading large volumes without significantly impacting market prices.
- Providing Liquidity: Helps in providing liquidity in less active securities.
- Cost Efficiency: Both parties can benefit from reduced transaction costs compared to traditional trading.
Comparisons and Related Terms
Riskless Principal Transaction
In a riskless principal transaction, the broker buys a security and then sells it to a client at a markup. Unlike CROSS transactions, the broker briefly holds the position.
Agency Trade
Here, the broker acts solely as an intermediary without holding any position, different from CROSS trades where the broker manages both sides of the transaction.
FAQs
Is crossing the same as internalization?
Why is market exposure necessary?
Are there any risks?
References
- Securities and Exchange Commission. (n.d.). Rule 72 - Discretionary obligations in broker-dealer transactions.
- FINRA. Broker-dealer operational guidelines.
Summary
CROSS securities transactions, where a single broker represents both sides of the trade, offer an efficient and cost-effective trading method, provided they comply with regulatory standards ensuring transparency and fairness. Understanding their implications, potential benefits, and legal requirements can help market participants navigate these trades effectively.
