Pre-Arranged Trading Definition

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Pre-Arranged Trading Definition

What Is Pre-Arranged Trading?

Pre-arranged trade may refer to trading that occurs at mutually agreed-upon pricing prior to execution. Conditional orders are often based on the notion of pre-arranged prices, which enable an investor to choose a price for execution on an exchange. In most circumstances, over-the-counter (OTC) orders are also pre-arranged.

Key Takeaways

  • Pre-arranged trading occurs when market counterparties agree on the price and conditions of a deal in advance.
  • Conditional orders are often based on the notion of pre-arranged prices, which enable an investor to choose a price for execution on an exchange.
  • In over-the-counter (OTC) marketplaces and with certain block orders, pre-arranged trading is widespread practice.
  • Pre-arranged trading is prohibited when market makers trade shares at pre-determined prices.

Understanding Pre-Arranged Trading

Pre-arranged trading may assist an investor in determining a price at which to make a deal in the open market. Conditional orders are essentially based on the notion of pre-arranged trading, which allows an investor to control risk by specifying specified purchase and sell prices. In many circumstances, block orders are also pre-arranged and may be crossed on regional exchanges or electronic crossing networks without violating any restrictions.

It is prohibited for market makers to trade stocks, futures, options, and commodities in advance. Most stock exchanges have restrictions against pre-arranged trade, and the Commodity Exchange Act specifically outlaws it in the commodities market.

Orders are executed on all forms of market exchanges using a bid-ask procedure that depends on market makers to connect buyers and sellers. Market makers are a diverse group of companies and trading platforms. Investors may make a number of different sorts of orders on the various securities that are available for trading. If a market or limit order is executed, it will be done through the bid-ask procedure assisted by a market maker.

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Illegal Pre-Arranged Trading

Pre-arranged trading is prohibited when market makers trade shares at pre-determined prices. Market makers attempt to ensure that assets available for trade on the open market are exchanged in an orderly manner. They connect buyers and sellers and benefit on the trade’s spread.

Certain exchange regulations, such as NYSE Rule 78, and legislation, such as the Commodity Exchange Act, restrict these market makers from colluding in the exchange of securities. Trading regulations consider this activity to be unruly and unfair to brokers, traders, investors, and other market players. Furthermore, these transactions are not subject to the market price and hazards associated with normal securities exchange trading.

An offer to sell combined with an offer to buy back is an example of this form of trading among market makers in the equities market. In the opposite case, a market maker might set up a purchase order with an offer to sell to another market maker at the same price or any other pre-arranged price that benefits the dealers participating in the pre-arranged trade.

For example, in the commodities market, two commodity dealers might theoretically employ pre-arranged trading to perform risk-free deals at predetermined prices rather than market pricing. This form of unlawful trading would reduce risk while possibly profiting the dealers involved. However, since it is not based on market maker pricing variables, it has a negative impact on the market and available market prices for other players.

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