Circular Trading: Faking Market Activity, Undermining Trust
What Is Circular Trading and How Does It Undermine Market Integrity?
Not all spikes in trading volume reflect real investor interest. In some cases, what appears to be market momentum is actually manufactured. Circular trading — also known as round-trip or round-robin trading — is a coordinated scheme where multiple participants pass an asset among themselves to simulate demand and inflate volume. The goal is to mislead others. These trades may look legitimate on the surface, but they result in no actual change in asset ownership. That means no new capital enters the market — only artificial signals that can trick other participants into making misinformed decisions.
How Circular Trading Works
Circular trading typically involves two or more parties colluding to pass the same assets back and forth. For example:
- Trader A sells assets to Trader B
- Trader B sells them to Trader C
- Trader C sells the assets to Trader A
This cycle can repeat many times, creating the illusion of high activity. From the outside, it may look like there’s strong market interest, but in reality, no real risk is being taken and no genuine demand is driving the volume.
Circular Trading vs. Wash Trading: What’s the Difference?
Circular trading and wash trading are often confused. Here's the key distinction:
- Wash trading typically involves a single trader using multiple accounts to buy and sell the same asset — creating fake activity within their own control.
- Circular trading involves a group of participants colluding to trade among themselves, making it harder to detect and trace.
Both practices are designed to mislead the market and both are illegal in many jurisdictions.
Why Do Traders Engage in Circular Trading?
Traders and platforms may engage in circular trading to serve several deceptive purposes:
- Inflating asset prices: A sudden spike in trading volume can make an asset look more valuable or in-demand than it is.
- Maintaining price levels: To keep an asset’s price from falling below a specific threshold, especially during sensitive periods like asset launches or before project announcements.
- Fabricate trading activity: To make a project, exchange, or protocol seem more active or successful than it really is.
The common denominator in all of these? Misleading others for personal or strategic gain.
Real-World Example: Enron
One of the most well-known examples of this tactic comes from traditional markets.
In the early 2000s, U.S. energy company Enron used round-trip trading (among other tactics) to falsely inflate its trading volume. By entering into prearranged buy-and-sell contracts with no real economic purpose, it gave the false impression that Enron was doing a high volume of business.
These trades created the illusion of growth and market activity, misleading investors and analysts. When the truth emerged, Enron collapsed — with round-trip trading being a piece of a wider pattern of manipulation that wiped out shareholder value and trust.
While this case didn’t involve crypto, it underscores the risk: when artificial activity goes undetected, real people lose.
Impact on Markets
Circular trading doesn’t just distort a single asset — it erodes the foundation of market trust. The risks include:
- False price signals: Investors act on fake momentum, not fundamentals.
- Price Volatility: When the manipulation ends or is exposed, asset prices may crash.
- Loss of trust: Repeated manipulation weakens trust in platforms, tokens and even the broader ecosystem.
What Kraken Does to Protect Market Integrity
Circular trading is intentionally hard to spot — especially across multiple actors or platforms — but exchanges like Kraken implement robust controls to detect and deter these tactics.
Our safeguards include:
- Market surveillance to identify suspicious patterns
- Internal controls to flag and investigate suspicious activity
- Regular reporting to regulators to maintain transparency and accountability
- Ongoing employee training to spot and escalate manipulation risks
Market manipulation like circular trading undermines the integrity of the financial system — whether in traditional finance or crypto. At Kraken, we work to create fair, transparent markets so that traders and investors can make informed decisions based on real data, not artificial hype.