Dual Trading Definition

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Dual Trading Definition

What Is Dual Trading?

When a broker makes transactions for both a client’s and their own accounts at the same time, this is known as dual trading. According to federal rules, this activity may be prohibited if certain requirements are not satisfied.

Key Takeaways

  • When a broker puts their own trade alongside a client’s transaction, this is known as dual trading.
  • If certain requirements are not satisfied, dual trading may be considered front-running, which is unlawful.
  • Dual trading supporters argue that market liquidity is increased, enabling markets to operate at peak efficiency.
  • Opponents argue that prohibiting dual trading would have no effect on market liquidity and would prevent illegal trading by eliminating any conflicts of interest.

Understanding Dual Trading

Dual trading occurs when a broker executes client orders while concurrently placing transactions in their own account or one in which they have a benefit stake as part of the same deal. This is also known as simultaneously functioning as an agent and a dealer. In the futures market, dual trading is common.

Dual trading is a contentious subject. Proponents argue that allowing brokers to trade in their own accounts as well as those of their clients helps market performance and liquidity since personal broker transactions account for a major amount of trading activity. Opponents argue that prohibiting dual trading would have no effect on market liquidity and would prevent illegal trading by eliminating any conflicts of interest.

Those who support dual trading believe that it is an important feature of many marketplaces and that dealer transactions are often required. They maintain that dealer deals constitute a significant portion of market activity on any given day. They also claim that dual trading abuse is more of a threat than a reality, and that most brokers can do what is best for themselves and their customers without a conflict of interest.

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Advocates of dual trading argue that if brokers were limited to only conducting agent (transacting for customer accounts) or dealer (transacting for their own accounts) trades each day, market activity would be greatly reduced, dampening liquidity and causing markets to not function at their maximum efficiency, which would be detrimental to the economy in general.

Dual trading has occurred in futures exchanges throughout the United States since the mid-1880s, when formal futures markets were established.

Regulation of Dual Trading

Market makers are authorized to conduct transactions for clients and on personal accounts under a dual trader/market-making arrangement. Dual trader markets have more market makers than similar markets that do not allow dual trading because they have two streams of money to pay the expenses of operation (commissions and dealer/speculator earnings). With more market makers, the degree of competition for market-making rises, increasing market liquidity and lowering trading costs.

In the United States and many other nations, there exist regulations that govern speculative trading. Before the broker is legally able to participate in dual trading activity, several prerequisites, most notably the customer’s approval, must be satisfied. Certain markets may be more receptive to dual trading, but opponents argue it has no intrinsic advantages for a broker’s customers or the market in general.

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