Circular Trading

Circular Trading means: Multiple parties sell the same assets – such as shares, cryptocurrencies, or other tradable goods – back and forth to one another in a circle. In the end, everyone owns the same thing they had before. No real purchase takes place, only the appearance of brisk trading. The goal is almost always deception: either to artificially drive up a price, or to report revenues in business reports that are not actually real.

Why Circular Trading damages markets

Functioning markets depend on prices reflecting real information. When many trades take place, investors conclude that a security is in demand. Circular Trading corrupts exactly this signal. Prices do not rise because someone genuinely wants to buy, but because a group has coordinated and staged it.

For uninvolved investors, this is dangerous. They see a seemingly liquid market – that is, many purchases and sales – and invest. When the manipulation comes to light or the group stops trading, the price collapses. The damage then falls on the real buyers, not on the people pulling the strings.

In corporate balance sheets, the effect is similarly destructive. Companies can sell each other services or goods that are immediately bought back. Each transaction appears in the annual report as revenue. Investors and lenders are thus given an inflated picture of actual business activity.

How a typical cycle is structured

The simplest model only needs two accounts belonging to one person. Account A sells a hundred shares to Account B. Account B sells them back to Account A. Both trades appear in the public order book as genuine transactions. In reality, nothing has changed – except that the trading volume has increased.

Professional variants run through many intermediate stations, often across several countries and currencies. This makes it harder to trace the cycle back. Sometimes dozens of seemingly independent accounts or companies are involved. The actual controller in the background remains invisible for as long as possible.

It is important to distinguish this from the concept of market making. A market maker also buys and sells very actively, but with real counterparties and their own risk. In Circular Trading there is no real risk, because the seller is simultaneously the buyer – directly, or through a colluding intermediary.

Circular Trading in the news and among regulators

The term mainly appears in three contexts. First, on cryptocurrency exchanges: several studies have shown that a significant portion of the reported trading volume on certain platforms consists of coordinated circular transactions. A widely cited analysis from 2019 estimated that over 95 percent of the volume on certain exchanges was fake.

Second, it appears in accounting scandals. The collapse of the German payment service provider Wirecard in 2020 showed how sham revenues can be hidden in balance sheets for years. Circular Trading is one possible tool among several in this regard.

Third, the term is increasingly occupying financial regulators worldwide. In the EU, the securities regulator ESMA monitors such patterns using automated systems that detect conspicuous trading patterns in real time. In Germany, the relevant authority is BaFin. In most countries, anyone engaging in Circular Trading is committing market manipulation – punishable by severe fines and prison sentences.