Circular Trading:

Circular Trading definedCircular trading is a fraudulent trading practice which aims at artificially creating high trading volumes and affecting the price of the stock. It is a practice whereby two or more brokers/clients enter the buy or sell order who know beforehand that a similar offsetting order for the same stock at a similar price and quantity have been entered or is to be entered at the same time by some another person.

For instance if two parties enter into a mutual understanding to artificially affect a stock price, then both of them may enter similar offsetting trades approximately at the same time which are of the same stock quantity and similar price. Such orders are executed at the same time and the LTP of the stock gets affected and also increases the traded volume. Some other retail investors by looking at the traded volume and the price movement also enter into the stocks and to their terror are prone to lose huge amounts. Such trades generally do not result in the transfer of beneficial ownership.

The market watchdog SEBI has discovered one of such incidence by two of the renowned brokers over a stock of Videocon Industries Ltd. way back in 2004. The involved brokers were Mansukh Securities and Finance Ltd. (MSFL) and Intec Shares and Stock Brokers Ltd. (ISSL). They both acted in conjunction and traded on behalf of their clients 14 Jan 2004 to 26 Feb 2004 which made the stock to lose it’s price from Rs. 36.15 to Rs. 28.19 which was over 20% fall. SEBI has imposed a fine of Rs. 2,00,000 each on both the brokers.

Such practices are strongly condemned as they misguide the common retail and small investor and make the stock markets lose their sheen and confidence.

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