What is ‘Daisy Chain’
Daisy chain is a term used to describe a group of unscrupulous investors who, when practicing a kind of fictitious trading or wash selling, artificially inflate the price of a security they own so it can be sold at a profit. Small-cap stocks with low liquidity are highly susceptible to daisy chains because price manipulation is typically harder for stocks with high trading volumes.
Explaining ‘Daisy Chain’
Daisy chain is a financial scam conducted by a group of investors in the public equities market. These investors team up to increase the value of an equity security, and then flip their ownership of that equity to unsuspecting investors who are chasing an upward trend.
How a Daisy Chain Scam Works
A group of investors team up to create a daisy chain by purchasing long positions in a low-priced and thinly traded small-cap stock. The group of investors, who normally have significant influence on the public markets, publicly disseminate faulty information that leads other investors to believe the stock is a good investment. Investors take the information presented and use it in an investment decision to purchase shares of the small-cap stock. This increases its trading volume and demand above normal levels and increases its price.
Punishments for Conducting a Daisy Chain
Daisy chains have become more prevalent in recent years due to the rise of marketing on the Internet. The Securities and Exchange Commission (SEC) is therefore tasked with the increased enforcement of punishment for any daisy chains. All daisy chain scams are considered an illegal practice in the public markets, and anyone found guilty of participation can face heavy fines and penalties.
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