Trading by Crossing

We study actual trading transactions that are darker than all “dark pools,” as they are truly invisible to the marketplace both pre- and post-trade. Using a proprietary dataset of institutional trades, we analyze internal crosses – transactions which allow institutions to match purchases and sales without exposing them to an external marketplace. Unlike dark pool trades, internal crosses are not publicly reported to the consolidated tape post-trade, but represent a meaningful proportion of reported volume. Over a 12-year sample period, we estimate total trading cost savings from internal crosses to be $1.9 billion for sample institutions. We also identify potential crosses as market trades that could have been crossed internally absent regulatory or other restrictions. We estimate cost savings from potential crosses to be about $2.4 billion. We provide the first evidence on significant cost savings of internal crosses, thus offer justifications for the Securities and Exchange Commission to continue to allow such invisible trading for mutual funds, and add support to the debate at the Department of Labor on whether to loosen the prohibition of cross trading for plan sponsors. We show that fund families with more assets under management and higher trading intensity are more likely to trade by crossing internally. Overall, our study provides concrete evidence for a new source of economies of scale in asset management via this unusual channel.