Circular trading is a type of fraudulent trading used to inflate volumes of securities in the market.
This type of trading can be done by brokers, financial institutions,investors having tremendous knowledge, experience and understanding of markets.
It is banned in India. A lot of people including the infamous stock-broker Ketan Parekh was arrested and banned from entering the stock markets till 2017.
Its next to impossible or seems unrealistic if you say you are trading/investing in Indian markets from years and haven't heard about these names - HARSHAD MEHTA AND KETAN PAREKH.
The biggest scam witnessed ever by the Indian markets was the Harshad mehta scam in 1992 followed by the Ketan parekh scam in 2001 involving thousands of crores of rupees swindled to manipulate the market and finding loopholes in the Indian banking system.
Ketan Parekh was arrested for having involved in circular trading and inflating volumes of many companies which leads to increase/decrease in a positive/negative sentiment among the investors in turn leading to rising/falling prices of the companies. So I believe this is worth mentioning.
Volume is one of the most important parameter used as an element to determine or predict movement rather try to point out the sentiment in all types of trading/investing in the stock-markets.
This image illustrates what circular trading is. The picture might seem a bit unclear but the basis of circular trading is that the seller knows that at the same time, at the same price and in the same script, a buyer is going to put an order of the same no. of shares being sold by the seller at that particular time. This means the deal is taking place between the seller and buyer if a huge no. of shares being sold and purchased at a particular time at the same price, so the result is that the CMP doesn't move up or down but the volume increases drastically. And imagine 4–5 buyers and sellers doing this kind of scheme in a matter of minutes just as being depicted in the picture. I.e. with relevance to the picture, the shares remain with the original buyer only but by doing this, the volume increases like anything which triggers the sentiment of many traders and investors who in turn try to buy/sell the script.
This kind of fraudulent trading whose sole intention is to manipulate the market in their favour is known as CIRCULAR TRADING.
Source;-Quora
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