Circular Trading

If you’re just getting into finance, be aware that it’s an industry full of scam artists. People will rip your face off and then trick other people into buying your used face because, hey, new face.

You’ve likely heard a lot about Ponzi Schemes and mortgage fraud, but there’s a world of scams and tricks and devious deeds. Many of which fall under the term of market manipulation.

Which brings us to a fraudulent scheme known as circular trading. This might sound like a bunch of people standing in a circle throwing ears of corn back and forth. But it's far more devious than it seems. In this scheme, a broker will enter sell orders for the same number of buy orders that he or she knows are happening in real time. The key here is that the offsetting orders are entered at the same price. By doing this, the broker ensures that the price will remain at a desired level while artificially inflating the volume totals. The scheme is designed to sucker people who see higher volumes into buying the stock because they perceive a higher level of market interest exists than does in reality.

Such artificial inflation in volumes can sucker people into buying the stock. However, once the scheme is discovered, the temporary lift in prices will quickly deflate, taking any unrealized gains down.