Third-Party Trades
There are certain trading practices where a third-party is involved in the transactions. The involvement of a third-party can introduce the possibility of a conflict of interest, which may reduce a customer’s ability to get the best execution on their transaction. FINRA and the SEC watch these types of transactions closely to make sure that these transactions follow regulatory practices and that customers are indeed receiving the best possible price on their transaction.
- • Cross Trading is when a broker or a portfolio manager executes a trade outside of a public market. The danger with this type of transaction is that one customer may not be getting the best price possible. This practice is generally prohibited except where the broker or manager can show that the transaction was beneficial to both parties. One example of this may be when a portfolio manager can swap securities between two of his/her clients and eliminate the spread on the transaction. When conducting a cross, brokers and managers must demonstrate that both parties received a fair price and record the transaction as a “cross” in their own records.
- • Step-Out Transactions are when one broker-dealer executes a transaction, but gives credit or part of the commission to another broker-dealer. This type of transaction may be used as a thank-you for some other services that the second broker-dealer has provided the first such as research or analysis. Step-out transactions also occur when an investment adviser directs one broker-dealer to execute a transaction, but then asks this broker-dealer to give part of the commission to another broker-dealer that offers the adviser soft-dollar services. These a