Shadow Trading

Shadow Trading refers to the practice where a trader or investor secretly executes trades in a manner that mirrors or influences the trades of another, often without the other party’s knowledge. This can involve executing similar trades shortly after a prominent investor makes a move, potentially benefiting from the price changes that result from the initial trade. Shadow trading can undermine market integrity and may be considered unethical or even illegal in certain jurisdictions.

Examples:

• A hedge fund manager executes a large buy order for a Stock. Shortly after, another trader buys a similar amount of the same Stock, anticipating that the price will rise due to the hedge fund’s influence.
• A trader observes that a well-known investor has bought a significant position in a specific Stock. The trader then purchases Shares of that Stock, aiming to profit from the subsequent increase in price driven by the investor’s reputation.

Cases:

• In 2016, the SEC charged a trader for engaging in shadow trading by mimicking the orders of institutional cLients, ultimately profiting from price fluctuations.
• In a 2020 case, a brokerage firm faced penalties for allowing employees to engage in shadow trading, which led to allegations of market manipulation.