Fictitious trades are deceptive transactions that initially appear to take place in the distant future but are later modified to reflect the actual settlement and trade date. They intend to manipulate the market by giving a false impression of movement. These trades involve practices like wash sales and matched orders.
Basics
A fictitious trade is initially scheduled for a future execution date but later adjusted to reflect the accurate settlement and trade date. It serves as a placeholder in securities transactions, often involving open dates or rates. Additionally, it can refer to a securities order that influences the price of a security without genuine competitive bidding or actual change in ownership. Examples of fictitious trades include wash sales and matched orders. The primary intention behind a fictitious trade is to manipulate the market by creating a false impression of movement, often orchestrated by brokers.
Fictitious Trade Example
For example, two companies participate in a series of ongoing transactions based on a weekly interest rate. To adapt to the variable interest rate, an open execution date is initially assigned until the specific rate is announced. The recorded transactions involve a cash exchange with an immediate settlement date, while the second transaction shares the same trade date but settles several weeks later. Periodically, the second transaction is updated to incorporate the correct interest rate and settlement date.
Kweku Adoboli's Fictitious Trading
Kweku Adoboli, a UBS trader working at the London office, was found guilty of fraud in 2012 due to his fraudulent trades that resulted in losses of $2.3 billion. These unauthorized trading losses, primarily incurred in exchange-traded index future positions, marked a historic event in British financial history. Adoboli used various deceptive tactics such as late bookings of real trades, recording fictitious trades, and engaging in fictitious deferred settlement trades. As a consequence of UBS's failure in systems and controls, the Financial Services Authority (FSA) fined UBS AG £29.7 million (about $40.9 million). This incident highlights the importance of robust systems and controls to prevent unauthorized trading and protect the integrity of financial markets.
Conclusion
Fictitious trades can manipulate markets by creating a false impression of movement. They involve practices such as wash sales and matched orders and can result in significant losses for investors. As with any investment, it is essential to conduct thorough research and due diligence before making any investment decisions