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- Circular trading is a type of securities fraud that can take place in stock markets, causing price manipulation and often related to pump and dump schemes. Circular trading occurs when identical buy and sell orders are entered at the same time with the same number of shares and the same price. As a result, there is no change in ownership of shares, but there is the appearance of an increased trade volume. Circular trading can be achieved by several parties colluding to achieve the fraudulent outcome. This is not to be confused with wash trading, which is where the same outcome is achieved but occurs through the actions of one investor, rather than a group. Circular trading is based on the premise that trading volume has a direct impact on share price. Trading volume increases are widely regarded as a signal that something important is happening within a company, such as a new product or a change in management that may be soon announced. Due to this, investors buy shares in order to take advantage of the expected increase in share value. This increases the value of the shares, causing them to become overvalued. Circular trading is fraudulent because the signal that investors receive to buy shares has no basis in reality and is made with the sole purpose of creating interest where none is warranted. Therefore, this fraudulent practice is widely considered unethical and is banned in many countries. This issue is most prevalent in India, where companies such as Videocon Industries Ltd had their shares devalued fraudulently by the Brokers Mansukh Securities and Finance Ltd. and Intec Shares and Stock Brokers Ltd. Circular trading has become a particularly important issue since the advent of high-frequency trading in the 1990s, which allows large investors and investor groups to perform an extremely high number of automated transactions in a short period of time. Powerful computers can be used to buy and sell shares in single stocks at immensely more rapid rates than humans can achieve manually. Consequently, creating the appearance of high trading volumes has become much easier, particularly in large companies where a very large number of transactions is required to simulate a realistic level of activity. (en)
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- Circular trading is a type of securities fraud that can take place in stock markets, causing price manipulation and often related to pump and dump schemes. Circular trading occurs when identical buy and sell orders are entered at the same time with the same number of shares and the same price. As a result, there is no change in ownership of shares, but there is the appearance of an increased trade volume. Circular trading can be achieved by several parties colluding to achieve the fraudulent outcome. This is not to be confused with wash trading, which is where the same outcome is achieved but occurs through the actions of one investor, rather than a group. (en)
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