5.14.10. 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 his 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.
• 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 arrangements can be problematic from a regulatory standpoint because it is often difficult to discern who is actua