Cross trading is a common practice in the financial industry, where two traders of the same firm exchange positions in their own securities. This is done to avoid market impact and improve execution quality. However, the rules surrounding cross trading can be complex, and it is crucial for traders and firms to be aware of the regulations and best practices associated with cross trading. This article aims to provide a comprehensive guide to cross-trading regulations and best practices, helping traders and firms make informed decisions when engaging in cross trading activities.

Regulations surrounding cross trading

1. US regulations

In the United States, cross trading is regulated by the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC). FINRA has established strict rules for cross trading, including the requirement for members to have a written cross-trading policy and to follow it consistently. The policy should include details on the types of securities that can be traded, the methods for communicating trades, and the responsibilities of both traders involved in the cross trade.

2. EU regulations

In the European Union (EU), cross trading is regulated by the European Market Infrastructure Regulation (EMIR) and the European Investment Bank (EIB). EMIR requires cross-trading of derivatives to be conducted through central counterparties (CCPs), while the EIB sets out specific rules for cross trading of equity and bond transactions. Both regulations emphasize the importance of transparency, accountability, and the prevention of market abuse in cross trading activities.

Best practices in cross trading

1. Clear communication

Clear communication is crucial in cross trading, as it helps avoid confusion and potential conflicts. Traders should use clear and concise language when discussing cross trading activities, and they should ensure that both sides of the trade understand the terms and conditions.

2. Comply with regulations

Firms and traders should be familiar with the regulations surrounding cross trading and ensure that their activities comply with these regulations. This includes following the written cross-trading policies of the firm and reporting any suspicious transactions to the appropriate authorities.

3. Consider market impact

When trading securities, traders should consider the potential market impact of the trade and take steps to minimize it. This can include using a market maker or a specialized trading firm to execute the trade, or ensuring that the size of the trade is appropriate for the market conditions.

4. Maintain records

Firms and traders should maintain detailed records of cross trading activities, including the details of the trade, the date and time of the trade, and the names of the traders involved. These records can help in the event of a dispute or to meet regulatory requirements.

5. Monitor and review

Firms and traders should regularly monitor and review their cross trading activities to ensure that they are in compliance with regulations and best practices. This can include reviewing trading patterns, identifying potential conflicts of interest, and updating cross-trading policies and procedures as needed.

Cross trading is a critical aspect of the financial industry, and it is crucial for traders and firms to be aware of the regulations and best practices associated with cross trading. By following these guidelines, traders and firms can ensure that their cross trading activities are both regulatory compliant and efficient, ultimately improving the overall efficiency and quality of their trading activities.