What it is:
Pairing off occurs when a brokerage firm buys and sells short and long positions thatone another and then settles those trades in .
How it works/Example:
Let's say Brokerage XYZ agrees to sell 100 shares of Company 123 to Brokerage ABC for $15,000. Simultaneously, Brokerage ABC agrees to sell 100 shares of Company 123 to Brokerage XYZ for $16,000. The difference between the two trades is $1,000.
Instead of actually trading the securities and transferring those shares to their respective accounts, the two brokerage firms pair off and just transfer the difference. In this case, Brokerage XYZ gives Brokerage ABC $1,000 instead of doing the actual transaction.
Why it matters:
Pairing off is against the law because it artificially alters and manipulates the market for the securities involved. The transactions give the impression of more demand for a security.