Cross-Trade

Managers sometimes hold a security in one fund and want to buy the same security for another. Crossing the trade can save costs and avoid moving the market price. It also creates a conflict, since the manager owes duties to both sides and could favour one, for example by moving a poor holding into a fund that will bear the loss. Rules therefore allow cross-trades only under conditions. Typical conditions are prior client consent or a policy disclosed to clients, a price set by an independent source such as the last market trade or midpoint, no extra fee to the manager, review by compliance and full records. Principal cross-trades, where the firm itself is a party, face stricter limits in many countries. Surveillance teams review pairs of opposite trades by the same manager to check pricing and fair allocation.

An asset manager's growth fund needs to sell 50,000 shares of a company, and its income fund wants to buy the same amount. The compliance officer approves a cross-trade under the firm's disclosed policy. The price is set at the midpoint of the market bid and ask at the time. Both funds avoid broker costs, and the trade is recorded with the pricing evidence for the next compliance review.