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The shocking scandal in the Indian stock market: How did circular trading change the fate of investors?
Round trading is a controversial scam in stock markets around the world that leads to price manipulation and is often associated with schemes to pump up prices and then sell them off. Circuit trading usually occurs when several parties collude and enter the same buy and sell orders at the same time, in exactly the same quantity and price. Although such a transaction does not change the ownership of the shares, it creates the illusion of increased trading volume and attracts investors' attention.
The idea behind cycle trading is that changes in trading volume directly affect the stock price.
Investors often view an increase in trading volume as a sign that something big is about to happen at a company, and this misconception prompts them to buy shares in the hope of profiting from it. However, this kind of buying behavior based on illusion will make the value of the shares overvalued, thereby damaging the legitimacy of the market.
Market consequences
In a typical scenario of cycle trading, a group of investors intentionally bid up a company's stock price and then sell their shares at a profit. Although this behavior is illegal, the market consequences are often less serious than people think. Of course, circular trading may also directly affect the success or failure of a company's operations, because investors tend to follow certain threshold behaviors-for example, after the share price reaches a certain level, they decide whether to continue to hold shares or sell.
Sometimes, cycle traders will control the stock price to maintain it above the threshold that is most beneficial to them, regardless of the actual true value of the shares.
In addition, circular trading can also cause serious market impacts at the time of an initial public offering (IPO). The success of an IPO often relies on market enthusiasm and hype. If someone deliberately manipulates this enthusiasm, the relevant company may be significantly overvalued, and the initial investors may ultimately suffer losses because the company's performance fails to meet expectations.
Case analysis
Circular trading is most common in India, where many high-profile cases have originated. In 1999, stockbroker Ketan Parekh was punished for his involvement in a large-scale stock market fraud, an incident that attracted widespread public attention. Parekh conspired with seven companies to use circular trading to inflate stock prices, and then quickly sold them after the IPO, causing many investors to be deceived.
The behavior of circular trading not only damages compliant operations that comply with the law, but also further undermines public trust in the stock market.
Through these actions, Parekh was found to have violated regulations again in 2012 and became the focus of attention. According to reports, he and a colleague in Singapore carried out multiple simultaneous transactions and made illegal profits of more than 10 million Indian rupees, which once again triggered condemnation of circular trading.
Not only that, in 2001, the Securities and Exchange Commission found that Angel Broking had misled the market by creating false trading volume for a company's shares for about a month. Ultimately, these actions not only led to a blow to investor confidence, but also challenged the stability of the entire stock market.
Countermeasures
In the face of frequent circular trading cases, the Securities and Exchange Board of India (SEBI) has implemented a series of preventive measures since 2010, including setting price ranges to limit stock price fluctuations on the day. These measures are designed to control abnormal fluctuations during trading and reduce the possibility of circular trading. However, these measures may in some cases limit reasonable responses to valuable changes.
However, as legal regulations strengthen, researchers are also looking for more effective detection methods to detect circular trading behavior.
For example, recent research explores the use of network analysis techniques to detect possible circular transactions, which will help policymakers more quickly expose these illegal transactions in the future. But as the market continues to develop, will new trading techniques continue to appear? How will this affect future stock market stability?
