How Does a Market Participant Place a Cross-Trade?
While cross-trading has a negative reputation and remains banned in some countries due to the possibility of misuse, cross-trading, if executed according to rules and regulations, can improve pricing, and increase order execution speed, especially in volatile markets.
The automated system will scan the internal order book and match client orders whenever possible, filling them off-exchange and routing access orders to the market or exchange. It is common for brokers to conduct cross-trading if they follow the legal and regulatory rules. While cross-trading can occur on market orders, they primarily apply for pending orders, filled as large block orders, and during volatile markets.
The cross-trade results in a low-latency transaction, and brokers who report pricing improvements over the order price will often accomplish it via cross-trading, an essential component for scalpers, high-frequency, algorithmic, and demanding day traders, especially in volatile markets.Debating the “what is cross-trade” benefits and its drawbacks remains a complex issue with fewer proponents than opponents.
Since cross trading is off-exchange and unofficial, opponents argue that neither side is aware of superior pricing. Cross-trading remains prone to manipulation and misconduct, but if executed per legal and regulatory requirements and classifications, the downside does not apply. Some countries ban cross-trading, and few traders actively seek it, but it can increase profitability, especially in highly volatile markets.
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