The stock market is an extremely lively place with a myriad of activities. People from all walks of life, right from seasoned traders to amateurs invest in the hope of making profits. In this juggernaut, not all participants take the legal path. Many scams in Indian stock markets (Harshad Mehta to Ketan Parikh) are proof of this. One shady activity in the stock markets is known as Circular Trading.

On August 22, 2003, the price of Morepen Laboratories hit upper circuit band of Rs. 8.75 on BSE as against its previous close of Rs. 9.65. Within 10 days, the volume touched as high as 14,765,062 shares in a single day on August 27 against a volume of 34,73,387 shares on August 21 on NSE. The Morepen Laboratories and the stock was on a spirited upward move and hit the upper circuit filters for eight consecutive sessions on the major bourses and price reached to a level of Rs. 17.35 on September 2. The delivery ratio (delivered quantity to total turnover) was as high as 99.71% at National Stock Exchange and 100% at Bombay Stock Exchange on September 2, 2003.

Circular trading is a trading scheme where sell orders are entered by a broker who knows that offsetting buy orders for the same number of shares at the same time and at the same price, either have been or will be entered. These trades do not represent a real change in the beneficial ownership of the security but artificially create a heavy demand due to which the price of the share starts rising. Sometimes circular traders are intended to depress the prices of the stock in order to create panic in the market. This is a fraudulent trading practice because this does not result in change in beneficial ownership of the stock. The basic purpose of these trades is to hike the price of the scrip artificially and create huge volumes in the market. A variant of circular trading is `jitney'. This is also a fraudulent trading in penny stocks. In this trading, two brokers work together to trade a stock back and forth. Circular trading may also be done by the companies belonging to the same group through different brokers. The circular trades are different from squaring transactions because in squaring transactions there are two different members or two different clients with one member and these transactions are entered at different times.

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