Jitney in finance can refer to a broker relying on another or manipulative practices such as circular trading, account churning, and the "jitney game." These techniques are illegal and used to make commissions, manipulate market prices, or trigger sell-offs. It's crucial to be aware of these practices to promote fair and legal market practices.
Basics
In finance, the term "jitney" has two meanings. Firstly, it refers to a broker who lacks direct exchange access and relies on another broker with exchange access to execute trades on their behalf. Secondly, it can also describe a form of market manipulation where brokers engage in trading securities among themselves to generate commissions and create the illusion of substantial trading volume.
What Is Jitneys?
Depending on the context, the term "jitney" can have either a neutral or negative connotation. In its neutral sense, it refers to a broker who relies on another broker to execute transactions, which is a common practice.
However, some brokers engage in collusion to dishonestly generate commission revenues or deceive other market participants into perceiving higher market interest in a specific security. This is achieved by repetitively buying and selling a particular security among multiple brokers, artificially inflating transaction volume.
These manipulative techniques, also known as circular trading, account churning, or a "jitney game," serve various purposes such as generating commissions, manipulating market prices, or triggering sell-offs by other investors. Typically, these schemes target thinly traded securities with low market capitalizations, often referred to as penny stocks. Apart from being illegal, these practices are disapproved by clients and other investors, which contributes to the negative connotation associated with the term "jitney" regardless of its original context.
Jitney Example
XYZ Corporation, a brokerage firm with direct exchange access, sometimes executes trades for clients through practices that fall under market manipulation. These practices include conducting repeated transactions between the firm and its clients to generate additional commission revenues, exploiting their clients in the process. They also engage in manipulating thinly traded securities, such as penny stocks, by creating false impressions of market interest through repetitive buying and selling at increasing prices.
Alternatively, they may employ similar tactics with decreasing prices to induce fear and prompt other security owners to sell, allowing XYZ Corporation to acquire shares at artificially low prices. These activities, commonly referred to as the "jitney game," are strictly prohibited under US laws and regulations due to their manipulation of the market.
Conclusion
Jitney is a term in finance that can refer to a broker relying on another to execute trades or a manipulative practice. Circular trading, account churning, and the "jitney game" are all illegal and disapproved by clients and other investors. It is important to be aware of these manipulative techniques to avoid falling prey to them and to promote fair and legal market practices.