Circular Trading

What Is Circular Trading?

Circular trading is a fraudulent scheme where sell orders are a that placed by a broker offsetting buy orders for the exact same number of shares simultaneously and, at a similar price, have either been or will be placed.

How Circular Trading Works

Such a trading scheme doesn't address a real change in the beneficial ownership of the security. Circular trading artificially swells volumes as a method for showing that a security has liquidity, keep up with share price at the ideal level, and to act as proof that there is market interest in the stock. The practice is prohibited and unlawful in various countries.

How Circular Trading Manipulates the Market

In the event that circular trades persevere, they can make a false feeling of activity around a stock that may influence its price. For instance, assuming that the trading price of a security was on a direction to fall below levels wanted by certain shareholders, a circular trade could effectively brace the share price by giving the impression that new owners are buying the stock at the ideal level. This activity could persuade others, who are not conscious of the scheme, to buy into the stock as they expect the trades demonstrate there is a developing interest in the stock. There might even be some assumption that the company is going to release news that, once made publicly known, would drive up the price.

In any case, since the circular trade scheme presents no real change in ownership nor address any actual action going to be announced, there is no basis for that discernment. In the event that the shares truly do rise in price subsequently, the value is fraudulently expanded. When the scheme is found, that artificial acceleration of the stock price will collapse in on itself, taking with it the funds invested by others.

Some [initial public offerings](/initial public offering) (IPOs) and penny stocks might be particularly helpless to circular trade schemes, especially to make the presence of serious trading activity and buzz encompassing a stock. The aim is to urge the stock to be siphoned up, driven by the consideration the cycle of trades attracts. A circular trading scheme commonly requires several participants to make the illusion of shares being acquired by new owners when, in fact, similar shares are basically gone through with no actual change in value.

Informal investors could fall casualty to such a scheme on the off chance that they are searching for new investment opportunities, see volume activity on a stock, and buy into it anticipating that the shares should raise in value.