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From Ketan Parekh to SEBI: Why is cycle trading the stock market's number one enemy?
In the stock market, cycle trading is a worrying form of securities fraud. This numbers game does not occur in isolation, and the malicious cooperation of many investors makes it a serious threat to the stock market. In this way, investors can deceive the market and affect stock price fluctuations and overall market confidence. In recent years, it has been a battle against circular trading, from the murky world of Ketan Parekh to the regulatory efforts of the Securities and Exchange Board of India (SEBI).
Definition and impact of recurring transactions
Cycle trading is when some traders repeatedly buy and sell stocks at the same number of shares and at the same price over the same period of time. The result of this kind of trading does not change the actual ownership of the stock, but it causes a false increase in trading volume.
“An increase in trading volume is considered a signal of major changes within the company, which often triggers panic buying by investors.”
At the root of this phenomenon is the belief that high trading volume means a company is undergoing some kind of transformation or success. However, cycle trading makes these signals deviate from reality. When investors invest based on false signals, the risks they face are self-evident.
Market consequences
Cycle trading has become increasingly prevalent amid the growing popularity of high-frequency trading, especially in the Indian stock market. When an investor group deliberately manipulates prices, its short-term benefits come from misleading other investors. But for the market as a whole, such effects are usually not immediately apparent.
“Many investors face excessively high stock prices due to circular trading, which severely damages their initial investment.”
In addition, the impact of circular trading on initial public offerings (IPOs) is even more shocking. Due to hype and volatility, many companies are overvalued when they first go public and subsequently cannot withstand the pressure of the real market.
Ketan Parekh and other cases
In India, the case of Ketan Parekh has become a typical example of circular trading. He was sanctioned for major stock market fraud in 1999. This case is still thought-provoking. The circular transactions that Parekh engaged in involved dozens of companies, which not only resulted in the loss of hundreds of investors, but also affected the confidence of the entire market.
"Parekh's operation was not only market manipulation, but also involved insider trading, which caused the incident to continue to escalate and eventually led to judicial sanctions."
Not only Parekh, in 2001, SEBI discovered that Angel Broking manipulated the stock price of Sun Infoways Ltd by falsifying trading volumes. Such behavior attracted the attention of financial regulatory agencies and began to deeply reflect on the ethics and transparency of the financial market.
SEBI’s reaction and future countermeasures
As the problem of cycle trading grows, the Securities and Exchange Board of India has initiated a series of measures to prevent this practice. They set transaction price ranges, which, while helping to reduce demonized transactions, also limits the flexibility of legitimate transactions.
"By raising the threshold and cost of transactions, SEBI allows the economic market to explain the bottom line of circular transactions for the second time."
In addition, academic research is also ongoing, hoping to find effective tools for identifying circular transactions. Through data analysis and network research, researchers have gradually realized the possibility of accurately identifying this scam.
Conclusion
The reason why circular trading can be an undercurrent in the financial market lies in its manipulation and utilization of market dynamics. This reflects the fragility of financial markets and calls on investors to remain alert to potential risks. In the future market, can we establish an effective mechanism to truly eliminate this kind of unethical trading behavior and protect the rights and interests of every investor?
