Key Takeaways

  • Cross investment definition typically involves a broker facilitating the transfer of a security or asset between two clients at the same price, without routing the trade through a public exchange.
  • Cross investments can occur in stocks, currencies, or between different funds operated by the same venture capital firm.
  • While cross trades can provide advantages like efficient trade execution and cost savings, they are subject to strict regulations to protect investor interests.
  • Types of cross transactions include opening and closing crosses, currency crosses, and cross-fund investments.
  • Risks include lack of price transparency and potential for conflicts of interest if not properly disclosed or regulated.

A cross investment takes place when a stockbroker trades the same stock between two different customers at the same price. This happens in various areas of the stock market and for various reasons.

What Is a "Cross" in Finance?

A cross in finance can happen when a broker purchases a stock and sells it for the same price, which causes an even trade between two investors. This happens in opening and closing crosses on the market and in foreign exchanges. In some cases, a cross will happen when a foreign currency trade happens across the U.S. market without first being converted into U.S. currency. This is a form of foreign exchange trading. Crosses also take place in securities trades.

Stockbrokers can receive different orders for purchasing and selling stock, but they must offer that stock on the market for a higher price compared to the original bid. If there isn't a higher bid available, the stockbroker is then permitted to perform a cross where the price stays the same for the sale as it was for the purchase.

Cross Investment Definition and Key Characteristics

A cross investment, also known as a cross trade, occurs when a broker matches a buy order and a sell order for the same security or asset from two different clients and executes the trade internally, rather than routing it through the public exchange. This process ensures that both sides of the trade are filled at the same price, often saving time and reducing transaction costs.

Key characteristics of cross investments include:

  • Both buy and sell orders are matched by the same intermediary (such as a broker or asset manager).
  • The transaction typically does not affect the public market price.
  • Used to achieve efficient execution for large or illiquid trades.
  • Common in situations where both clients trust the broker to ensure fair pricing.

Why Cross Investments Occur:

  • To avoid market impact or volatility that might arise from a large order.
  • To facilitate internal fund transfers, such as between funds managed by the same investment company.
  • To provide liquidity for thinly traded securities.

What Is an Opening Cross?

The stock exchange, Nasdaq, posts the opening cross information, which is the data regarding all interest available for buying or selling two minutes before it opens. Stockbrokers can post orders for purchase of stock at the opening price. They can also purchase if there are order imbalances. This allows for interest price dissemination and limited liquidity disruptions.

What Is a Closing Cross

When Nasdaq matches the offers and bids at the end of the day to create final stock prices, this is called a closing cross. Stockbrokers can order stocks for "market at close" or "limit at close." This means that they will be able to lock in that closing price for either market value or a limited value. This whole process takes place between 3:50 and 4 p.m. each day. Any cross orders will then be carried out within the five seconds following 4 p.m.

What Is a Currency Cross?

On the foreign exchange market, the U.S. dollar (USD) is traded more than any other currency. Without currency crosses available, investors who were trying to trade across the euro (EURO) and yen (JPY), called the EURJPY had to first convert those currencies into the U.S. dollar. They would have to follow these steps:

  1. Buy EURO.
  2. Sell USD.
  3. Buy USD in the same amount they sold.
  4. Sell JPY.

This means that the trader would have to pay the bid spread twice and would have to deal in the USD amount instead of the EUR or JPY. Even though this requires more steps, sometimes traders will still choose this approach. It can offer some risk management when there is marked instability in one of the foreign currencies being traded.

Currency cross allows trades to happen across foreign currencies without the need to transfer either currency into USD. The EUR versus JPY and the GBP (British pound) versus the CHF (Swiss franc) are the most common trades to take place via currency crosses.

What Is a Cross Trade?

Cross trades take place when orders are bought and sold regarding the same asset but are not recorded on the exchange as a trade. This practice is not allowed on most of the big stock exchanges.

A cross trade can also take place if a stockbroker buys and sells an order for one security across two separate client accounts. For instance, if a stockbroker's two clients are each interested in the same stock, one wants to sell and the other wants to buy, the broker might make the trade between the two without documenting the trade on the stock exchange.

Cross trading is a risky and non-ideal practice due to the pitfalls that come when actions aren't properly recorded. If a broker makes a trade between two of their customers without documenting with the exchange, those customers might not be getting the accurate market values for their trade. This can lead to investors being kept in the dark on available pricing, which isn't good trading practice.

It's a good idea to make sure all of your trades are recorded with the appropriate exchange, whether you're a broker or investor working with a broker. There are some scenarios in which cross trades are allowed. If an asset manager has two clients interested in a buy and a trade of the same asset and can prove that they are getting the competitive rate for the trade, then the cross trade may be permitted.

Examples of Cross Investment

Here are a few practical examples that illustrate how cross investment works:

  • Equity Trading: A brokerage firm has two clients—Client A wants to sell 5,000 shares of a company, and Client B wants to buy 5,000 shares. The broker matches the two orders at the same price and executes the trade internally.
  • Cross-Fund Investment: A venture capital firm with multiple funds invests in the same startup through more than one fund. For instance, Fund I and Fund II both buy shares of Company X, creating a cross-fund investment situation.
  • Currency Crosses: A broker facilitates a trade between clients exchanging euros for yen, without first converting to US dollars. This is common in foreign exchange markets.

Advantages and Disadvantages of Cross Investments

Advantages:

  • Efficient Execution: Helps large orders avoid slippage or moving the market price.
  • Reduced Costs: Can save on exchange fees or commissions.
  • Privacy: Large trades can be executed discreetly, reducing exposure to market speculation.

Disadvantages:

  • Lack of Transparency: As trades may not appear on the public exchange, investors may not get full price discovery.
  • Potential for Conflicts of Interest: If not properly regulated, brokers could execute trades at unfavorable prices.
  • Regulatory Scrutiny: Many jurisdictions require disclosure and compliance checks to prevent abuse.

Regulatory Environment for Cross Investments

Cross investments are subject to strict regulatory oversight to protect investors from unfair practices. In the United States, for example, the Securities and Exchange Commission (SEC) requires:

  • Brokers must ensure trades are executed at fair market value.
  • Disclosure of cross trades to both clients.
  • Approval and documentation, especially for investment advisors and fund managers.

Some markets prohibit cross trades except in very specific, pre-approved situations. Always check the local regulations or consult an attorney if you are considering or offered a cross investment.

Cross-Fund Investment

A cross-fund investment arises when a venture capital firm manages multiple funds and invests in the same company from more than one fund. For example, Fund A and Fund B—both managed by the same VC—could each hold shares in Startup X. This can create unique opportunities for resource pooling and risk diversification, but it also raises potential conflicts of interest regarding valuation and allocation.

Cross-fund investments require careful management, transparency, and often specific disclosures to investors in each fund. Regulatory guidance may require additional safeguards to ensure fairness for all parties involved.

Frequently Asked Questions

1.  What is the cross investment definition in finance?

A cross investment refers to a transaction where a broker or asset manager matches buy and sell orders internally, often between two clients or funds, at the same price, rather than executing through a public exchange.

2. When are cross investments permitted?

They are typically permitted when both parties receive fair market value, regulatory requirements are met, and there is no disadvantage to either client. In some markets, cross trades must be disclosed and approved.

3.  What are common types of cross investments?

Types include cross trades of stocks, currency crosses in forex trading, and cross-fund investments within venture capital or asset management.

4.  What are the main risks of cross investments?

Risks include lack of transparency, potential conflicts of interest, and regulatory penalties if not properly managed or disclosed.

5. How do cross-fund investments work in venture capital?

They occur when more than one fund managed by the same VC firm invests in the same company, requiring clear policies to manage any potential conflicts and ensure all investors are treated fairly.

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