Crossing Network (ATS)

Contributor Image
Written By
Contributor Image
Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.
Updated

Crossing networks are alternative trading systems (ATS) that offer an alternative trading venue to traditional exchanges.

They offer a platform where buyers and sellers can directly exchange assets, cutting out the middleman.

The primary function of a crossing network is to match buy and sell orders without routing them through a public exchange.

This means that the price of the asset isn’t influenced by public trading activity.

Instead, crossing networks typically use a reference price from another market, often the midpoint between the bid and ask price.

 


Key Takeaways – Crossing Network (ATS)

  • Anonymity and Confidentiality – Offers traders privacy by concealing order details, preventing market impact from large trades.
  • Better Pricing and Lower Costs – Matches orders at midpoint prices for better rates and reduced costs, bypassing intermediaries.
  • Reduced Market Impact – Executes trades internally, shielding broader market from volatility and price movements.

 

What Sets Crossing Networks Apart from Traditional Exchanges?

Anonymity

Crossing networks prioritize anonymity, allowing traders to keep their orders hidden from the public.

This can be appealing for large institutional traders who don’t want their trades to move the market.

Reduced Market Impact

Since trades are executed internally, crossing networks don’t contribute to price volatility in the broader market.

Potential for Price Improvement

By matching orders directly, crossing networks can often offer better prices than those available on public exchanges.

Lower Transaction Costs

With no intermediaries, crossing networks usually have lower fees than traditional exchanges.

 

Why Is It Called a ‘Crossing Network’?

It’s called a crossing network because it facilitates the “crossing” of buy and sell orders directly between parties, bypassing traditional public exchanges.

 

Types of Crossing Networks

Crossing networks aren’t all the same. Let’s look at the main types:

Institutional vs. Retail

Some crossing networks cater exclusively to large institutional investors like pension funds and hedge funds.

These networks handle massive block trades and prioritize anonymity.

On the other hand, retail crossing networks open their doors to individual investors, though they may have higher minimum order requirements than public exchanges.

Broker-Operated vs. Independent

Some crossing networks are run by brokerage firms as a value-added service for their clients.

Others are independent entities that offer a neutral platform for multiple brokers and their clients to interact.

Choosing between them often depends on your existing brokerage relationships and the specific features you’re looking for.

Specialized Networks

Many crossing networks handle a wide range of securities, but some specialize in specific asset classes like equities, fixed income, or derivatives.

These specialized networks may offer deeper liquidity and tailored trading algorithms for their particular niche.

 

Advantages of Using Crossing Networks

Crossing networks have unique ways of operating compared to public exchanges.

Let’s look into how they work:

Order Matching

They use specific algorithms to match buy and sell orders.

These algorithms consider factors like price, volume, and the time an order was placed.

Some algorithms prioritize price improvement, while others focus on maximizing the number of shares executed.

Timing

Crosses can occur continuously throughout the trading day or be scheduled for specific times.

Continuous crossing offers more flexibility but may not guarantee the largest possible trade size.

Scheduled crosses, on the other hand, concentrate liquidity at specific intervals, potentially leading to larger executions.

Anonymity

Crossing networks are designed to protect trader identities.

They use various techniques like order aggregation or randomized order execution to prevent anyone from deciphering who’s buying or selling.

This confidentiality is especially important for institutional traders who want to avoid revealing their strategies and impacting the market.

 

Regulatory and Compliance Aspects

Regulation is a hot topic when it comes to crossing networks. While they offer unique benefits, they also present some challenges from a regulatory perspective.

Oversight

Crossing networks typically fall under the purview of securities regulators like the Securities and Exchange Commission (SEC) in the United States.

They must register as alternative trading systems (ATS) and comply with various rules designed to promote fair and orderly markets.

These rules cover areas like trade reporting, best execution, and market manipulation.

Transparency and Fairness

One of the biggest challenges facing crossing networks is balancing their inherent anonymity with the need for market transparency.

Regulators are keen to make sure that these networks don’t become havens for insider trading or other illicit activities.

Striking the right balance between privacy and transparency is an ongoing discussion.

Another concern is the potential for conflicts of interest, especially in broker-operated crossing networks.

Regulators are vigilant about making sure that brokers don’t prioritize their own interests over those of their clients when matching orders.

As an example, there’s ongoing debate about whether crossing networks should be required to disclose more information about their trading activity or adopt stricter pre-trade transparency measures.

Technology

Regulators are increasingly using sophisticated surveillance tools to monitor trading activity in crossing networks and detect any signs of market abuse.