Definition of dual trading

What is dual trading?

Dual trading occurs when a broker trades for his clients’ accounts and his own accounts at the same time, which can be illegal if certain conditions are met.

Key takeaways

  • Dual trading occurs if a broker places his own trade alongside a client’s trade.
  • Dual trading can be dictated as advance, which is illegal, if certain conditions are not met.
  • Proponents of dual trading argue that market liquidity is improved, allowing markets to function at maximum efficiency.
  • Opponents say that banning dual trading would not affect market liquidity and would eliminate illegal trading by eliminating any conflicts of interest.

Understanding dual trading

Dual trading is when a broker simultaneously executes clients’ orders and trades on their own account, or one in which they have a beneficial interest, as part of the same trade. This is also known as acting as an agent and distributor at the same time. Dual trading prevails in the futures market.

Dual trading is a very controversial topic. Proponents say that when brokers are able to trade on their own and their clients’ accounts, they contribute to market performance and liquidity because personal broker trades make up a large part of trading volume. On the other hand, opponents say that banning dual trading would not affect market liquidity and would eliminate illegal trading by eliminating any conflict of interest.

Those who are in favor of dual trading argue that it is an important aspect of various markets and that exchanges with distributors are often essential. They insist that dealer transactions are an important part of market activity on any given day. They also argue 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 clients without a conflict of interest.

Proponents of dual trading further argue that if brokers were restricted to running only agent trades (transactions for client accounts) or brokers (transactions for own accounts) every day, market activity would slow down considerably, reducing the liquidity and would cause markets to not function at their maximum efficiency, which would be detrimental to the overall economy.

Dual trade regulation

Dual trading has been occurring on futures exchanges in the United States since organized futures markets began in the mid-1880s. Under a dual trader / market-making system, market makers can execute transactions to clients and personal accounts. With two sources of income to cover the costs of the business (commissions and profits from traders / speculators), the markets of two operators have a greater number of market makers than comparable markets that do not allow dual trading. With more market makers, the level of competition for market making increases, increasing market liquidity and reducing trading costs.

There are laws regulating dual trading in the US and many other countries. The broker must meet certain conditions, in particular that the client must give his consent, before he is legally allowed to engage in dual trading activity. Certain markets may be more open to dual trading, but opponents of the practice believe that it has no inherent benefit to a broker’s clients or to the market in general.

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Mark Holland

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