Cryptocurrencies like Bitcoin (BTC) are on decentralized peer-to-peer (P2P) blockchains, but many traders first interact with digital assets on regulated centralized crypto exchanges (CEXs). Thanks to convenience and accessibility, CEXs process billions of dollars in transactions each day and are popular platforms for transferring between crypto and fiat currencies. While every transaction that takes place on an onchain decentralized exchange (DEX) is visible, CEXs functions offchain—meaning not all token transfers take place in the open.
For example, cross trading on crypto exchanges is a more shadowy practice that sometimes puts traders in a precarious position.
In this guide, we’ll define cross trades, discuss how they work, and review their purpose. We’ll also weigh their risks.
What is cross trading?
Typically, when traders want to buy or sell a crypto asset, their request goes into an order book, and the CEX matches pairs of buyers and sellers in the public market. When a cross transaction happens, however, there's no trace of these transfers taking place on a public exchange. A cross trade happens when an exchange's brokers match buy and sell orders between clients for the same asset without publishing this data in an order book. The only entities who know about these trades are the brokers facilitating this transaction off-record.
How do cross trades work?
Brokers or portfolio managers who engage in cross trades directly swap a cryptocurrency between two accounts under their supervision. While these matched trades often happen in managed accounts with internal clients, it's also possible to cross trade assets across exchanges if brokers find willing counterparties and attractive opportunities. No matter how brokers route these trades, they don't use the traditional order book reporting method or release cryptocurrencies to the public market.
Since cross trading skips over standard order book procedures, many CEXs don't allow this activity on their platforms. However, there are instances when CEXs recognize broker-assisted cross trades, provided they promptly supply the full details of the transaction. In these cases, brokers still enjoy the benefits cross trades offer without interfering with a CEX's transparency standards.
What is the purpose of cross orders in crypto?
Brokers often prefer cross trading because it tends to be faster and cheaper than traditional order book trading. There aren't any exchange fees associated with completing a cross trade, and traders enjoy faster transaction finality because the cryptocurrency goes directly between accounts rather than through the public market.
Beyond these conveniences, cross trading helps minimize price volatility for crypto assets. Since cross trades take place off order books, market participants don't see major fluctuations in a cryptocurrency’s supply, keeping prices relatively stable even when entities shift large quantities of digital assets.
Some brokers also use cross trading to exploit minor inefficiencies between crypto exchanges through arbitrage trading practices. Arbitrage techniques rely on quickly transferring significant amounts of cryptocurrencies to maximize gains when there are discrepancies between virtual asset prices on multiple trading platforms. Traders who successfully use arbitrage reap profits while adjusting supply and demand dynamics throughout the crypto market.
What are the risks of cross trading?
The most controversial aspect of crypto cross trades is their lack of transparency. Since cross trades happen outside the public market and off official order books, traders involved in these transactions don't know if they'll get the best market price for their digital assets. Outside market participants won't see the orders for a cross trade, so they can't react to supply and demand dynamics in real time. Crypto traders who use cross trades need to believe the rates a broker settles on are superior to the dynamic prices on the open market.
Another drawback of cross trades is traders entrust their broker or portfolio manager with legally carrying out a successful cross trade, introducing an extra layer of counterparty risk to each transfer. Without a transparent record of buy and sell requests on a CEX's order book, crypto traders don't have a public paper trail to monitor their cryptocurrency orders. Critics also argue the secrecy of cross trades obscures supply data, deprives market participants of buying and selling opportunities, and serves as a potential cover for manipulative market practices.
Can cross trades be block trades?
While cross and block trades often overlap, these two transaction types aren't identical. The defining feature of block trades is that they involve large quantities of assets and typically occur between institutional clients. Brokers often negotiate the details of a block trade before executing multiple smaller orders to avoid triggering excessive price volatility.
Like cross trades, block trades take place off public exchanges, but brokers need to report the details of these transactions to authorities to comply with local legal standards. If a cross trade involves large transfers between institutional clients, it likely qualifies as a block trade, but cross trades don't need to fit into this mold.
Are cross trades the same as wash trades?
Wash trades are another type of transaction often confused with cross trades, but the former category has significant distinctions and legal implications. In a wash trade, malicious actors transfer assets between accounts they own to create the illusion of intense buying or selling activity. This type aims to obscure genuine data on a cryptocurrency's supply, demand, and daily volume to mislead traders to enter a position.
Unlike cross trades, wash trading has no legitimate purposes, and it’s always considered unethical in the crypto market.
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