What is cross trade and is it legal?
Successful trading in Forex and choosing the best trading strategy are usually linked. For any trader, backtesting suitable trading techniques is an integral part of a profitable activity, so understanding the differences between individual trading strategies can be called the key to a well-built career in the field of Forex trading. Consciousness when deciding to trade within the framework of a specific algorithm is extremely important due to the fact that with all the variety of strategies, you should adhere to those that benefit you.
Today we are going to be conversing about such a phenomenon as cross trade. We will tell you how this concept is revealed in the context of a particular market, but we will make a special emphasis on whether cross trade is possible in Forex. The readers of our blog will probably be surprised when they hear the question about the legitimacy of cross trade in the currency exchange, but we would like to note in advance: the conclusion of cross transactions does not seem to be realistic in all exchanges. Moreover, in most major exchanges, such manipulations are prohibited. In this case, what is the relevance of the cross trade issue?
So, first of all, we propose to understand the meaning of the term “cross trade”. In a generalized, universal sense, it implies the fact that the purchase and sale of the same trading product (or, in other words, an instrument, an asset) is performed outside the registration of this transaction in the exchange. This way, trading in stocks, options, currency and cryptocurrency can be carried out, but there will be no mark about the official execution of the transaction in the exchange. You may ask, why conduct transactions bypassing the exchange, if everything can be done absolutely legally and without breaking the rules?
Indeed, in the leading exchanges, including when trading currencies in Forex, there are certain conditions when cross trading is considered acceptable. What are the eligibility criteria for a cross transaction? Cross trade in Forex can be considered as a correct activity, if, for example, both parties (a seller and a buyer) are clients of the same asset owner. For greater clarity, let’s say this: the holder of an asset (in this case, it can be currency or cryptocurrency in Forex) allows their clients to conduct a transaction with each other and omit the formalities.
Thus, each case where the buyer wishes to purchase a commercial product from the seller should be considered separately, taking into account the specifics of the situation itself, in which the transaction is supposed to be made. It is impossible to come to an unambiguous conclusion that cross trade contradicts the rules of the exchange, since there are circumstances allowing such an activity. Therefore, now that we have discussed the nuances associated with the legal basis of cross trades in Forex, we will move on to a detailed analysis of the positive and negative aspects of such a trading practice.
How to get a permission to cross trade?
Due to the fact that cross trades regulation is not only about the that such transactions with assets are prohibited, an ordinary user of the Forex platform, especially a novice trader, may have difficulty remembering situations in which cross trading is still legitimate. There are many traders who want to follow the rules and who are afraid of illegal actions at the same time. How do you learn the intricacies of cross trading? Let’s get focused on some of the key conditions for cross transactions. Having delved into this information, you will feel confident when deciding on the admissibility of cross trading in Forex.
There are a few main cases in which cross trade is allowed to be considered. Awareness of this issue will help a trader to avoid legally risky undertakings, building their actions in Forex trading exclusively in full compliance with the rules of the exchange. In addition, the broker may also have the right to cross trade if a number of conditions are met. Let’s take a closer look at what these situations are. So, cross trade is legal if:
- both the buyer and the seller transact under the direction of a single holder of the assets;
- prices in a single case of cross trade are recognized as adequate in relation to the average market indicators;
- the transfer of client assets between accounts is carried out, while the broker does not notify the exchange about the current transaction;
- the process of hedging the transaction takes place.
The most common reason for not registering cross transactions in the Forex exchange is the first case, which we considered at the beginning of our review. Indeed, when the assets have a common owner, it is not obligatory to notify the trading platform about the sale and purchase of currency. Another important criterion for refusal from the mandatory registration of a transaction is the recognition of the asset price as competitive. To do this, it is required to prove to the exchange that the proposed price indicators are acceptable and mutually beneficial for the parties to the transaction.
It should be borne in mind that cross trading in Forex is quite specific. A portfolio manager usually strives to ensure that a transaction does not go beyond trading between his clients, that is, the manager’s goal is to move funds between their accounts on the basis of evidence. The peculiarity of the legal aspect of cross trading in these circumstances is the registration of the transaction as a cross transaction, where both the asset manager and the broker prove to the exchange the fairness of the price.
Features of cross trading when hedging transactions in Forex
Let’s pay attention to the characteristic details of the hedging process when it comes to cross trading in Forex. There will also be no rules violations of the trading platform if the certain conditions are followed. As comes from the hedging principle, an example of a cross type of such a transaction can be trading on long positions, for example, on the EUR / USD and USD / CHF currency pairs. For cross trading in Forex to be profitable, you need to choose currency pairs with high volatility and trade throughout the day, which means the day trading strategy may meet your goals.
Hedge-based cross trading implies that the insurance transaction is entered into a different asset from the underlying. Of course, if a trader wants to trade in Forex profitably, then an essential requirement for cross trading will be the mandatory prevalence of profits over losses during hedging. The fundamental principle of risk management is based on the fact that a single trade should not be unprofitable for more than 5% of the total trader’s deposit. In addition, it is highly undesirable to invest in assets that are close in correlation to more than 10% of the entire capital.
Cross trading in Forex when using the hedging mechanism is understandable if you consider the basics of its implementation. In the case of a cross purchase and sale, a new transaction must be made for an asset, the price of which depends on the value of the underlying asset. Thus, it would be logical to conclude that if the price of the underlying asset goes down, then the price of the asset for hedging in Forex also changes downward. If the price rises, a similar process will take place, that is, the hedged asset will also rise in price.
Target audience and specificity of cross trade
Again, if we consider the big picture in all markets as a whole, and not only in Forex, then the most interested in cross trading will be those investors who make transactions with highly volatile assets (these can be securities or, for example, currency). The common denominator here is that in cross trading, investors have no obligation to quote a price for the next stage of the transaction. The broker receives buy and sell orders from different, independent investors, on the basis of which the broker compares prices.
The phenomenon of cross trade in itself is difficult to assess unequivocally. Naturally, if the process of buying and selling assets is improperly organized, problems may arise, in particular, for a novice Forex trader. We advise you to take a closer look at some points when conducting cross trading in order to avoid in advance controversial situations from a legal point of view in currency and stock exchanges. Legal literacy is very important in this regard, so let’s list all hypothetical cross trade vulnerabilities. So, here they are:
- lack or absence of the necessary reporting documentation;
- reputational risks and a decrease in the degree of confidence in the market as a whole;
- creating an illusory activity for artificial market manipulation.
What are reporting problems when it comes to Forex cross trading? This means that if the parties to the transaction bypass the stage of its registration in the exchange, then one of these parties (or even both) may not be able to trade assets at the best market price. It should be noted that these indicators are available for those traders who are not involved in cross trading. And in this case, investors may not know what price was prevailing in the market.
The second reason for doubts about the reliability of cross trading can be such a reason as the attitude of traders to the very mechanism of conducting transactions in this way. If a transaction is carried out without registering in the exchange, some participants may have doubts about the honesty of the other side, and hence trust in the market in principle inevitably decreases, since the peculiarity of the human psyche consists in thinking out negative scenarios, even if the transaction was made on fairly fair grounds.
And finally, another factor influencing the reputation of a cross trading strategy is a market mechanism in which fake, illusory activity can be forcibly created, aimed at manipulating the trader’s consciousness. In exchange slang, these actions are labeled as “paint the tape.” Of course, this has more to do with the securities market than with cross trading in Forex, but the principle is the same: illegal methods are used to change the price of an asset.
What conclusion can be drawn from this extensive information on cross trade? Summarizing all the above points, we are going to state: cross trading is allowed if all the rules required for this are met, and it is potentially beneficial for those investors who work in markets with high volatility. If you want to test the Forex cross trading strategy and make it profitable for yourself, then the main recommendation from our side will be strict adherence to the legal norms of the trading platform and a rational analysis of all the steps you take.