Buy High Sell Low

As we all know, “buy low sell high” is the invincible law of investing. If someone is deliberately breaching this principle, he would be in trouble.

From time to time I observe some clients trading with the following red flags:

• They focus on stocks with thin turnover;
• Their trading volume corners the market turnover;
• They conduct day trading, where the time interval between the buy order and the sell order is quite short; and
• The buy order price is often the same as, or even lower than, the sell order price.

Securities regulators would probably regard the above trading pattern as potential market misconduct (namely false trading) because it appears to have no economic substance. If the market is normal (all demands and supplies are genuine), nobody can always buy low sell high (otherwise he is the God). Market manipulators just intend to create artificial turnover. If they persistently buy low sell high, arbitragers would be attracted. So they would only persistently buy and sell at the same price, or buy high sell low.

Compliance professionals should endeavor to detect such suspicious transactions, block these fraudsters and file suspicious transaction reports to regulatory authorities. Of course, occasional “buy high sell low” may not be suspicious (it may be caused by a wrong judgement), but persistent behavior is another matter. That’s why detection of suspicious transactions requires holistic consideration of various red flags.