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?

  • $\begingroup$ I am not well-versed in US markets but I cannot imagine that crossing between brokers can be accomplished for listed stocks without having to report the trade in any regulated market. In most regulated market even internal crosses (crossing inside the same regulated entity) requires the cross to be reported to the exchange within a certain time period. But to answer your question, crossing itself generally does not harm any other market participants except those who would have otherwise received commission. There are hundreds other practices that harm retail investors more than crossing does. $\endgroup$ – Matt Jan 17 '14 at 2:15

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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