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What is Cross Trade

25 Sep 2023

Introduction

If you are a trader, you must know what a stock exchange is. One of the roles of an exchange is to record every transaction made for buying or selling a trading instrument. But is there any way to make a trading transaction without letting the stock exchange know about it? Yes, cross-trade is a practice that facilitates it. But before you try to make a cross-trade, read this blog to learn everything about it.

What is cross-trade?

Cross-trade is a practice that allows the buying and selling of the same trading instrument by two different individuals without letting the transaction get registered with the respective stock exchange. A cross-trade can only occur when the trading instrument is the same as the trade price. Now, the question is if this practice is legal.

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Most stock exchanges, including BSE and NSE, don't allow cross-trade. The reason is that a cross-trade is mainly done to save money that an individual has to pay to buy or sell a trading instrument. Moreover, a cross-trade is very rare to execute by an individual, as many aspects must be the same, including the price, trading instrument and even the time. So, it is mostly performed by brokers and portfolio managers.

When is a cross-trade valid?

You may think it is a totally impermissible activity, but there are some situations where a cross-trade is not regarded as an offence. So, let's understand two examples of when a cross-trade is valid.

1. Cross-trade by the same asset manager

The first situation is when the two individuals making the buying and selling transactions of the same asset are managed by the same asset manager. In this case, the asset manager moves the stocks from the seller's account to the buyer's account.

However, the manager should make the cross-trade only if the trade is fair for both parties. Since the trade doesn't get recorded on the exchange, the parties cannot check if they get a fair trade. So, the manager is one who should make sure that the act is totally fair for both. 

2. Shifting assets from one account to another

Sometimes, an individual has to shift his assets from one account to another. In this case, cross-trade can be done. The reason is the person will have to pay unnecessary charges twice if he does it through a regular transaction. 

Wrapping it up!

To sum up, cross-trade is not a totally impermissible activity as there are cases when you can make a cross-trade. However, it can't be used with every trade you make, and neither it's possible. So, if you are also interested in making money from the stock market, open a Demat Account with Motilal Oswal and start trading today!

 

Related Articles: What is Risk Tolerance in Bond Market | A Guide to Contrarian Investing | Why You Should Consider Investing in Dividend Stocks

 

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