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 澳洲幸运5开奖号码历史查询:brokerage firm. In step-out trading, one brokerage executes a large order and then gives other brokerages credits or 澳洲幸运5开奖号码历史查询:commissions for the share of thꦦe trade that it executes. Although different brokerages are executing different blocks of the trade, each block will be executed at the same price.

Step-out trading can also refer to an order that is executed entirely by one brokerage that simply gives credits or commissions to other firms for p💞ortions of the trade, which it might do if those firms provided research and analysis. The firms that are the recipients of the stepped-out trade execute the other side of the equation—what is sometimesℱ called a stepped-in trade.

Step-Out Trading Explained

Step-out trading typically involves trades placed by investment advisers on behalf of their clients. It can involve an 澳洲幸运5开奖号码历史查询:investment manager making a decision to execute a trade with a 澳洲幸运5开奖号码历史查询:third-party broker-dealer other than the company that they nor꧟mally work with.

With this kind of step-out trade, 澳洲幸运5开奖号码历史查询:investment managers of 澳洲幸运5开奖号码历史查询:separately managed accounts place certain orders with another company. The purpose is to help the investment manager in meeting their obligation to seek what is called 澳洲幸运5开奖号码历史查询:best execution for the particular trades. B🍃est execution requires that an investment manager must place client trade orders with companies that the manager thinks are capable of providing the best execution possible for their clients' orders.

The qualifications the manager looks at when seeking the best executiꦐon include finding the best opportunity to get🔴 a trading price beyond what is currently being quoted and finding a company that can execute the trade quickly.

Managers need to be completely transparent with advisors and clients and provide additional details regarding these trades, so as to allow them to have as much information as possible insofar as the manager's trading practices. It is also critical that managers divulge what, if any, additional transaction costs will be passed on to the advisors and clients as a result of the step-out trade.

Because the manager is using a third party to execute a trade other than their normal brokerage, there is ofꦉten a fee associated with the trade, which the investor must p🌊ay.

Regulatory View on Step-Out Trades

The SEC has raised concerns that step-out trades may not result in best execution, which brokers are legally required to provide, and may have 澳洲幸运5开奖号码历史查询:disclosure issues. Rule 10b-10 provides some protection against these potential problems by requiring the different brokerages participating in the step-out transaction to provide certain material information about the trade in their trade 澳洲幸运5开奖号码历史查询:confirmations.

On the other hand, step-out trading can also facilitate the 澳洲幸运5开奖号码历史查询:best execution and can be a good way to compensate different broker🦄ages f🌱or their research and analysis activities.

Real World Example of Step-Out Trading

A recent report from fund manager Ameriprise Financial (AMP) showed that a number of the equity investment managers that they work with performed step-out trades in 2019 and 2020, typically resulting in either no fee or a fee of up to 5 cents per share.

For example, Ameriprise said that ETF manager Invesco (IVZ) stepped-out 53.22% of client trades in its U.S. Real Estate Securities Fund in 2019. However, it was able to do this without passing on any additional fees to clients.

By contrast, a number of firms did pass on fees. For example, Legg Mason (LM) stepped-out 1.54% of client trades in its Dividend Strategy Balanced Fund in 2020 and charged clients 1.49 cents per share.

On the higher end of the spectrum, in 2019, Oak Ridge (BKOR) stepped-out 1.14% of client trades in their Oak Ridge All Cap Growth fund. In exchange, they charged clients 5 cents per share.