Prearranged Trading

Prearranged Trading - Coniston, Lake District, England
Prearranged Trading

Prearranged trading illustrates an implied agreement between brokers. Mostly this agreement is private and only known to the participating brokers. While trading, a lot of floor traders and floor brokers are offering and/or bidding.

Now it is possible that, for example, a commodity dealer does not want to trade commodities at market prices because of market risk. He can avoid this risk under a prearranged trade with another commodity dealer on predetermined prices. Prearranged trading is often used to gain tax advantages.

That is the reason why this kind of arrangement is prohibited by the Commodity Future Trading Commission (CFTC). The prohibition of such a behavior is regulated in the rule 539 of the Chicago Mercantile Exchange (CME). Another negative result is the limiting of stock exchange trading.

Because prearranged trading happens besides the regular trading, the traded commodity under this arrangement is not traded at the stock exchange. This causes a limitation of the regularly traded commodities and hence pushes the prices upwards because the supply is much less than that without prearranged trading.

There are some exceptions that allow prearranged trading. h is is regulated under Rule 10b5-1 of the United States Securities and Exchange Commission (SEC). Individuals who are not in possession of nonpublic information can sell and buy stocks or commodities of a company under prearranged trading plans.