Step-Out Trading: Definition, Execution, and Impact
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Summary:
Step-out trading involves the execution of large orders by multiple brokerage firms, each assigned portions of the trade by another firm. It can also refer to trades placed by investment advisers with third-party broker-dealers on behalf of their clients. While step-out trading can facilitate best execution, it may involve additional fees for clients, necessitating transparency and disclosure from investment managers.
What is step-out trading?
Step-out trading is the execution of a large order by several brokerage firms that are each assigned portions of the trade by another brokerage firm. It can also involve trades placed by investment advisers with third-party broker-dealers on behalf of their clients.
Step-out trading explained
Step-out trading typically involves trades placed by investment advisers on behalf of their clients, seeking best execution for their trades. Investment managers may choose to execute trades with third-party broker-dealers other than their usual brokerage firms.
Regulatory view on step-out trades
The SEC has raised concerns about step-out trades, emphasizing the need for best execution and disclosure. Rule 10b-10 mandates material information disclosure in trade confirmations.
Real world example of step-out trading
Ameriprise Financial reported instances of step-out trades by equity investment managers, with varying fee structures. Some firms passed on fees to clients, while others did not.
Frequently asked questions
What is the purpose of step-out trading?
The purpose of step-out trading is to execute large orders efficiently by involving multiple brokerage firms or executing trades with third-party broker-dealers.
How does step-out trading impact clients?
Step-out trading may result in additional fees for clients, depending on the fee structure adopted by the brokerage firms or investment managers involved.
Key takeaways
- Step-out trading involves the execution of a large order by several brokerage firms, each assigned portions of the trade by another brokerage firm.
- It can also refer to an order executed entirely by one brokerage, giving credits or commissions to other firms for portions of the trade.
- Investment managers use step-out trading to seek best execution for client orders, considering factors like price and speed of execution.
- Regulators like the SEC monitor step-out trades to ensure compliance with best execution requirements and disclosure rules.
- Step-out trading can result in additional fees for clients, but it can also facilitate access to specialized services and expertise.
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