How circular trading creates fake volume
High trading volume often makes a share look popular and active. But volume can be faked. Circular trading is one way of doing it. This page explains what circular trading is, how it works, why it is illegal and how to spot warning signs.
Quick answer
Circular trading is a form of market manipulation where a group of connected traders repeatedly buy and sell the same shares among themselves. There is no real change in who owns the shares overall, but the trades create a false impression of high volume and demand. This can push the price up and attract genuine investors, whom the group then sells to.
Key takeaways
- Circular trading passes shares around a connected group.
- It creates fake volume without real change in ownership.
- The false activity can lure in genuine investors.
- It often targets small, thinly traded shares.
- SEBI's PFUTP Regulations prohibit it.
What is circular trading?
In this scheme, a set of people or entities that work together trade shares in a loop. A sells to B, B sells to C, and C sells back to A, often at gradually rising prices. Each trade shows up as real volume on the exchange.
From the outside, it looks like many investors are interested in the share. In reality, the same group is moving shares around among themselves, and their combined holding barely changes.
How does it work, step by step?
| Step | What happens |
|---|---|
| 1 | A group of linked accounts holds a small company's shares |
| 2 | They trade among themselves at rising prices |
| 3 | Volume and price rise, catching attention |
| 4 | Genuine investors start buying |
| 5 | The group sells to them and exits |
The group may use accounts in the names of relatives, employees or shell companies to hide that the traders are connected. Trades are often matched at agreed prices and times.
Why is circular trading harmful?
Volume and price are signals investors use to judge interest in a share. Fake volume gives a false signal. Investors who buy because the share seems active may end up holding it when the group exits and the price falls.
It also damages trust in the market. Honest companies and investors suffer when prices do not reflect genuine demand.
What does SEBI do?
Circular trading is a fraudulent and unfair trade practice under SEBI's PFUTP Regulations, 2003. SEBI has passed many orders against groups found trading in loops, often in small company shares, banning them from markets and imposing penalties.
Exchanges track links between accounts, such as shared addresses, phone numbers or bank accounts, and look for repeated trades among the same group. Such patterns can trigger surveillance alerts and investigations.
Circular trading and the tax angle
The term is also used outside the stock market, for example in GST fraud, where companies issue invoices to each other in a loop without real goods to claim false tax credits. The idea is the same: activity that looks real but has no genuine economic purpose.
How to spot warning signs
Be careful when a small share suddenly shows very high volume and rising prices without any company news. Check whether the share is under exchange surveillance, and study the company's results and business before investing.
Frequently Asked Questions
What is circular trading?
Circular trading is when a connected group repeatedly buys and sells the same shares among themselves to create fake volume and move the price.
Why is circular trading done?
It creates a false impression of demand, which can raise the price and attract genuine investors, whom the group then sells to.
Is circular trading illegal in India?
Yes. It is a fraudulent and unfair trade practice under SEBI's PFUTP Regulations, 2003.
How is circular trading detected?
Exchanges track links between accounts and repeated trades among the same group, and SEBI investigates suspicious patterns.
What is circular trading in GST?
In GST fraud, it means companies issuing invoices to each other in a loop without real goods to claim false tax credits.
Disclaimer: Investments in the securities market are subject to market risks. Please read all related documents carefully before investing. This article is intended for informational and knowledge purposes only and should not be considered tax, financial, or investment advice. Tax laws and deductions may vary based on individual circumstances and regulatory changes. Readers are advised to consult a qualified tax advisor or financial professional before making any investment or tax planning decisions.
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