Category: Cross Rate

Currency Crosses

The U.S. dollar (USD) is the most actively traded currency in the multi-trillion-dollar daily foreign exchange market. In the past, investors or hedgers who wanted to trade a pair such as the euro vs. the yen, known as EUR/JPY, needed to do it through the dollar.

This meant that buying EUR and selling JPY required the following two steps:

1. Buy EUR and sell USD and
2. Buy the same amount of USD and sell JPY. Disadvantages of this approach include paying the bid/offer spread twice (once in each currency pair) and needing to deal for a USD amount rather than a EUR or JPY amount.

However, the dollar pairs are more actively traded than the cross, so in times of volatility or reduced liquidity, traders may still execute via the components.

The most actively traded currency crosses are the euro vs. the yen, British pound (GBP), and Swiss franc (CHF). Cross trades can be done for any spot, forward, or option transactions.

Golden Crosses and Death Crosses

Technical analysis involves the use of statistical analysis to make trading decisions. Technical analysts use a ton of data, often in the form of charts, to analyze stocks and markets. Technical traders learn to recognize these common patterns and what they might portend for the future performance of a stock or market.

A golden cross and a death cross are exact opposites. A golden cross indicates a long-term bull market going forward, while a death cross signals a long-term bear market. Both refer to the solid confirmation of a long-term trend by the occurrence of a short-term moving average crossing over a major long-term moving average.

Either cross may occur as a signal of a trend change, but they more frequently occur as a strong confirmation of a change in trend that has already taken place.

What Is the Meaning of Crossing Shares?

Crossing shares is when one broker pairs off a buy and sell order from two separate customers of the same stock at the same price. Before crossing the trade, the broker must offer the stock for a higher price than the bid price in the market. If the higher price is not accepted, then the broker can execute the orders.

Is Cross Trading Illegal?

A cross trade occurs when a buy and sell order for the same stock is offset from one another and not recorded on the exchange. This type of trade is not allowed on most of the large exchanges. A concern of cross-trading is that it may be used to “paint the tape,” whereby market players manipulate the price of a stock on purpose by buying and selling it amongst themselves.

What Is a Closing Cross?

A closing cross is a type of trade on the Nasdaq that determines the closing price of securities on the exchange. Nasdaq developed the closing cross to ensure that every security has a uniform closing price at the end of the day. Nasdaq stipulates that after 3:55 p.m., close orders may not be entered or altered, except for actual errors. The closing cross occurs at 4:00 p.m

If a stockbroker receives separate orders to buy and sell at the same price at the same time, they must offer the stock in the market at a higher price than the bid. If no higher bid is available, they can execute the two deals at the same time and at the same price.

Opening and Closing Crosses

The Nasdaq gathers and posts data on all buy and sell interest in the two minutes prior to its opening; this information is referred to as the opening cross. Traders can post orders to buy at the opening price or to buy if there is an order imbalance. This dissemination of pricing interest helps to limit disruptions in liquidity.

The closing cross on Nasdaq matches bids and offers in a given stock to create a final price of the day. Traders can place orders that can be either “market at close,” which means buy or sell at the official closing price or “limit at close.”

In the latter case, if the price at the close is better than the specified limit, the deal will be executed at the market price. Nasdaq collects data for the closing cross between 3:50 p.m. and the closing time of 4:00 p.m. Cross orders are executed between 4:00 p.m. exactly and five seconds after 4:00 p.m.

The major crosses have bid-offer spreads slightly wider than the major dollar-based pairs, but they are quoted actively in the interbank market.

Spreads in the minor crosses are generally much wider. Some are not quoted directly at all, so a quote must be constructed from the bids and offers in the component currencies versus the U.S. dollar.

Cross rates that are traded in the interbank market but are far less active include the Swiss franc versus the Japanese yen, or CHF/JPY, and the British pound versus the Swiss franc, or GBP/CHF.

Cross rates involving the Japanese yen are usually quoted as the number of yen versus the other currency, regardless of the other currency.

Cross quotes in currencies that are similar in value and quoting convention must be posted carefully in order to prevent mistakes in trading. For example, the New Zealand dollar (NZD) was quoted at 1.11 per Australian dollar (AUD) in early June of 2022.

Both of these currencies are quoted against the U.S. dollar. That is, the value reflects the number of U.S. dollars it would take to buy the foreign currency. However, the quote provides no guidance as to which is the base currency. The market convention is to use the stronger AUD, which is also the larger economy, as the base. However, the two currencies trade near parity to each other, creating the potential for a misquote.

Any two currencies can be quoted against each other, but the most actively traded cross currency pairs are the euro versus the British pound, or EUR/GBP, and the euro versus the Japanese yen, or EUR/JPY.

In fact, these two pairs are the only cross-rate currency pairs that appear in the top 10 most traded currency pairs.1

The euro is the base currency for the quote if it is included in the pair. If the British pound is included but the euro is not, the pound is the base.

These currencies are actively traded in the interbank spot foreign exchange market, and to some extent in the forward and options markets.

Foreign exchange (forex) traders use the term cross rate to refer to price quotes between any pair of currency in which neither is the U.S. dollar.

Most transactions on the forex are in major currency pairs. That is, one of the currencies being swapped is the U.S. dollar. For example, if you see on a financial news site that USD/CAD is quoted at 1.28, it means that one U.S. dollar is currently equal to 1.28 Canadian dollars.

A cross rate also refers to a currency pair or transaction that does not involve the currency of the party initiating the transaction.

An exchange rate between the euro and the Japanese yen is considered to be a commonly quoted cross rate because it does not include the U.S. dollar. In the pure sense of the definition, however, it is considered a cross rate if it is referenced by a speaker or writer who is not in Japan or one of the countries that use the euro as its official currency. While the pure definition of a cross rate requires that it be referenced in a place where neither currency is used, the term is primarily used to reference a trade or quote that does not include the U.S. dollar.

In the transaction described above, the U.S. dollar is used to establish the value of each of the two currencies being traded.

For example, if you were calculating the cross rate of the British pound versus the euro, you would first determine that the British pound, as of June 6, 2022, was valued at 1.25 to one U.S. dollar, while the euro was valued at 1.07 to one U.S. dollar.

A cross rate is a foreign currency exchange transaction between two currencies that are both valued against a third currency. In the foreign currency exchange markets, the U.S. dollar is the currency that is usually used to establish the values of the pair being exchanged.

As the base currency, the U.S. dollar always has a value of one.

When a cross-currency pair is traded, two transactions are actually involved. The trader first trades one currency for its equivalent in U.S. dollars. The U.S. dollars are then exchanged for another currency.

KEY TAKEAWAYS

• A cross rate by definition may be any exchange of any two currencies that are not the official currency of the country in which the quote is published.
• In practice, any currency exchange in which neither of the currencies is the U.S. dollar is considered a cross rate.
• One of the most common cross currency pairs is the euro and the Japanese yen.