Two potentially troublesome, but commonly accepted, trading practices that are addressed in comprehensive compliance programs are cross trading and order aggregation. Cross trading occurs when an adviser or its affiliated broker, acting as a principal, engages in a transaction with a client. An agency cross trade occurs when an adviser or its affiliated broker, acting as agent, arranges a transaction between two clients. In either a principal cross trade or an agency cross trade, a given client is at risk that another party (either the adviser or another client) is being, or will be, favored over that client. Order aggregation, also known as bunching, batching, or trade aggregation, refers to the practice of combining orders for execution. When an adviser must select a client’s and possibly advisory personnel’s orders that will be aggregated and allocate the execution prices among those orders, a given client is at risk that another party (either another client or advisory personnel) is being, or will be, favored over that client. The existing regulatory frameworks for cross trades and bunching address potential conflicts of interest, but they do not, and cannot, anticipate every situation that may present conflicts or influence execution decisions. As a result, compliance personnel must look beyond the regulatory framework and remain attentive to market and other factors that influence execution decisions within the firm.
CitationDownload as .RIS
Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited