What Is a Fictitious Trade?

Mary McMahon
Mary McMahon

A fictitious trade is a securities transaction that is falsified in some way for the benefit of the trader. This term can also refer to a type of placeholder used to record a transaction and updated later with correct information. Fictitious trades in the first sense are illegal because they are a form of market manipulation, where a broker or trader aims to benefit from a perceived change in the market that is actually created through their actions. The second type may be used for certain kinds of securities transactions by agreement.

Man climbing a rope
Man climbing a rope

One example of a fraudulent fictitious trade is a wash trade, where brokers simultaneously buy and sell securities to create the illusion of activity. There is no net change in ownership as a result, but to other traders, it looks like something is happening on the market. This can stimulate actual activity which the broker may exploit. Other trades may be used to create the illusion of account activity on a client’s statement in order to cover up embezzlement and other fraudulent activities.

Regulators monitor the market for signs that investors are engaging in market manipulation, and they are alert to signs of a fictitious trade. Engaging in such activity can be grounds for expulsion from an exchange as well as legal penalties. If the trading is used to falsify account records for the purpose of defrauding clients, they may also sue for compensation and breach of contract. Money managers are charged with a fiduciary responsibility, meaning that they must care for their client’s assets responsibly, and fraudulent trades are a breach of professional ethics.

In effect, a fictitious trade appears to take place on the open market and looks legitimate to an outsider, but is actually fake. The securities aren’t transferred to another party and any profits that may appear to have been realized are also false. These trades may be recorded on a client’s account to make it look like trading activity is occurring so that at a casual glance, customers think their assets are in good hands.

As a placeholder, a fictitious trade may be part of a regular transaction agreement between two companies. They set a date in the future and update it when they have information about the correct rate and settlement date to finalize the trade. This is used to record an agreement without setting the date and rate, because these may change in accordance with the terms of the contract.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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