Step Out Transaction Definition

What is a step transaction?

Bounce trades are large orders executed by several brokerage firms, each of which is allocated a portion of the trade by another brokerage firm. In step-by-step trading, one brokerage firm executes a large order and then provides credit or commission to other brokerage firms based on its share of the trade executed. Although different brokers are executing different blocks of trades, each block will be executed at the same price.

Bounce trades can also refer to orders executed entirely by one brokerage firm that simply give credit or commissions for a portion of the trade to other firms, which it may do if those firms provide research and analysis. Companies that are recipients of exit deals execute the other side of the equation — sometimes called step deals.

Step Out Trading Explained

Bounce transactions typically involve transactions made by investment advisors on behalf of their clients. It may involve investment managers deciding to execute trades with a third-party broker-dealer other than the firm they normally work with.

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Through this step trade, an investment manager who manages an account independently places a specific order with another firm. The purpose is to help investment managers meet their obligations to seek so-called best execution for a particular transaction. Best execution requires investment managers to place client trade orders with firms they believe will provide the best execution of their client orders.

Qualifications managers consider in their search for best execution include finding the best opportunity to obtain transaction prices that exceed current quotes, as well as finding firms that can execute trades quickly.

Managers need to be fully transparent to advisors and clients and provide more details about these transactions so that they can learn as much as possible about the manager’s trading behavior. It is also important that managers disclose that exiting the trade will result in additional transaction costs (if any) for advisors and clients.

Because managers use third parties to execute trades rather than their normal brokerage operations, there are often transaction-related fees that investors must pay.

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Regulatory Perspectives on Step Trading

The SEC raised concerns that exiting the trade may not result in best execution, which brokers are required by law to provide, and there may be disclosure issues. Rule 10b-10 provides some protection from these potential issues by requiring the various brokers involved in exiting trades to provide certain important information about the trade in their trade confirmations.

On the other hand, stride trading can also promote best execution and can be a great way to compensate for the research and analysis activities of different brokers.

key takeaways

  • Bounce trades are large orders executed by several brokerage firms, each of which is partially traded by another firm.
  • Step trades can also refer to trades made by investment advisors on behalf of their clients with third-party broker-dealers.
  • Step trades may include additional fees charged to clients, but such fees may be considered a reasonable trade-off if they enable the manager to provide clients with the best possible trade execution.

A real example of stride trading

A recent report by fund manager Ameriprise Financial (AMP) showed that some of the equity managers they work with made stride trades in 2019 and 2020, often charging no fees or charging up to 5 cents per share.

For example, Ameriprise said ETF manager Invesco (IVZ) exited 53.22% of client trades in its U.S. real estate securities fund in 2019. However, it was able to do so without passing on any additional costs to customers.

By contrast, some companies do pass on fees. For example, Legg Mason (LM) exited 1.54% of client trades in its dividend strategy balanced fund in 2020 and charged clients 1.49 cents per share.

On the high end of the spectrum, Oak Ridge (BKOR) exited 1.14% of client transactions in 2019 in its Oak Ridge Total Growth Fund. In exchange, they charge customers 5 cents per share.

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