How Off-Exchange Cross Trades Can Affect Retail Execution Prices
Summary
This note explains a potential disadvantage of off-exchange crosses in US equities. When two brokers agree to trade directly, the execution price may fall anywhere within the bid-ask spread. A price nearer the bid favors the buyer, while one nearer the ask favors the seller, so the cross may not give both sides the best available price for their respective transactions.
The discussion says this concern is especially relevant to penny stocks and contrasts US practice with more tightly regulated crossing in Europe. It does not explain whether or how an unreported cross changes displayed market prices, nor does it provide empirical evidence or a detailed account of reporting rules. The takeaway is about how the negotiated execution price can distribute value between counterparties; the regulatory comparison is brief and should not be generalized beyond the markets described.
Key ideas
- An off-exchange cross may be priced within the bid-ask spread.
- A cross nearer the bid favors the buyer, while one nearer the ask favors the seller.
- The note highlights penny stocks and describes US crossing as less regulated than European crossing.
- It does not establish how an unrecorded cross affects displayed prices.
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Full text
# How does a cross trade pose a problem to the retail investor # How does a cross trade pose a problem to the retail investor How does a cross trade pose a disadvantage to the retail client. In this explanation It says: ``` This opens the door for one or both parties to not receive the best price for either portion of the dual transaction ``` If broker A is buying and broker B is selling and the trade is not recorded in the exchange, then how does it affect the retail investor? If the trade does not record in the exchange, will the trade still affect the price? ## Answer by lehalle (score 1, accepted) https://quant.stackexchange.com/a/9959 I guess this remark refers mainly to "penny stocks". In the US (it is not true in Europe where crossing is far more regulated) it may be possible to choose to cross at any point inside the bid-ask spread. It means that if it is closer to the bid than to the ask, it will advantage the buyer. In Sub Penny Trading in US Equity Markets (by Romain Delassus, Stéphane Tyc), this point is discussed in detail.
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