What is a "daisy chain"?

By Chizoba Morah AAA
A:

A daisy chain is a term used to describe a group of investors who engage in activities that inflate or deflate the price of a stock for the purpose of selling it for profit or buying it cheaply. Daisy chaining involves creating transactions to make a particular stock appear more active than it actually is. One way people engage in daisy chaining is by buying securities at low prices, passing the securities through other brokers at prearranged higher prices and buying back the securities at higher prices at the end of the day.

For example, in a classic daisy chain, Broker A buys a stock at $40 and sells the stock for $45 to Broker B, a daisy chain member. Broker B then sells the stock for $50 to another broker on the chain. At the end of the day, Broker A buys the stock back at $50. Thus, for someone outside of the chain, the stock price looks like a good investment because it climbed from $40 to $50 in a single day.

Investors who come into the market buy the stock at $50 and the brokers who are a part of the daisy chain sell it for $50. While the daisy chain brokers may profit from these falsely boosted transactions, manufactured transactions of this kind hamper the natural flow of activity for securities and can be dangerous for investors.

For more on this topic, read Investment Scams.

This question was answered by Chizoba Morah.

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