Cross Investment: Everything You Need to Know
A cross investment takes place when a stockbroker trades the same stock between two different customers at the same price.4 min read
2. What Is an Opening Cross?
3. What Is a Closing Cross
4. What Is a Currency Cross?
5. What Is a Cross Trade?
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.
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:
- Buy EURO.
- Sell USD.
- Buy USD in the same amount they sold.
- 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.
If you need help with a cross investment, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.