Circular Trading

Circular trading, also called wash trading or round-tripping in some jurisdictions, is designed to deceive other market participants. When stock A appears to have traded 10 lakh shares in a session, a retail investor might reasonably conclude that there is genuine interest in the stock from diverse buyers and sellers. If those 10 lakh shares were actually traded among a tightly coordinated group who sold to each other in sequence — Entity A to Entity B, Entity B to Entity C, Entity C back to Entity A — the volume signal is false. No genuine change of economic ownership occurred, yet the stock appears highly liquid and actively followed.

The purpose of creating artificial volume is typically to prepare the ground for a price manipulation campaign. Operators first establish apparent liquidity (via circular trading), then promote the stock through social media or WhatsApp tips, attracting genuine buyers who see the volume as a sign of institutional interest. Once retail participation drives the price up, the operators distribute their holdings to the incoming buyers at elevated prices — the classic pump-and-dump structure with circular trading as an early component.

SEBI's enforcement actions have uncovered numerous circular trading rings over the years, often concentrated in the SME IPO segment and the penny-stock universe. The investigations typically involve SEBI's trade surveillance data cross-referenced with depository records to map the beneficial ownership behind trading accounts. When investigators find that large proportions of a stock's volume consist of trades among accounts linked to the same promoter group, operator, or family network, circular trading is suspected.

The penalties for circular trading include disgorgement of unlawful gains, monetary penalties, debarment from accessing capital markets for specified periods, and in severe cases, references to law enforcement agencies under the Securities and Exchange Board of India Act, 1992, which allows for criminal prosecution. The SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003, explicitly prohibit artificial volume creation and price rigging.

For retail investors, circular trading creates deceptive signals that distort investment decision-making. Screening stocks for unusually concentrated ownership, promoter involvement in large trades, and volume spikes concentrated in off-market hours can help identify stocks that may be subject to manipulation.