What is a Pairoff?
A pairoff, also known as 'pairing off,' occurs when a brokerage firm buys and sells short and long positions that offset one another and then settles those trades in cash.
How Does a Pairoff Work?
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. In this case, Brokerage XYZ gives Brokerage ABC $1,000 instead of doing the actual transaction.
Why Does a Pairoff Matter?
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.