What Does a Jitney Do?
If a broker doesn’t have direct access to an exchange, they rely on another broker who does have access to the exchange to make deals for them. This is known as a “jitney.”
Another meaning of the word is “market manipulation,” which is when brokers trade stocks back and forth with each other to make money and make it look like there is a lot of trading going on.
How to Understand Jitneys
The word “jitney” can mean something good or bad, depending on the situation. In the first case, where one broker relies on another to carry out deals, nothing wrong is probably happening.
On the other hand, some traders have been known to work together dishonestly to make commissions or trick other market players into thinking there is more interest in security than there is. To do this, one or more traders buy and sell the same investment over and over, which increases the number of transactions.
This method—also called circular trading, account churning, or a “jitney game”—can be used to make money by charging fees, driving up the price of a security on the market, or getting other buyers to sell. Penny stocks and other assets with shallow market values and liquidity are often central to these schemes. The word “jitney” can have a wrong meaning no matter what it means in a given situation because it is illegal, and clients and other investors don’t like these kinds of activities.
A Jitney in the Real World
You can directly connect to a big market through XYZ Corporation, a brokerage business. They sometimes make deals for a nervous client named ABC Financial to get more business.
Even though these deals are legal, these two companies also do other things that might not be so good. For example, XYZ and ABC sometimes do the same business with each other more than once to make more money. This is the same thing as stealing from their customers.
Some of the other things these companies do are buy and sell lightly traded securities like penny stocks, buying and selling their shares repeatedly at prices that keep going up. If the stock doesn’t trade very often, other market players might think that the rising price of the shares is a sign of genuine market interest, which could bring in buyers from outside the market. Then, XYZ and ABC will make money when they sell their shares to these new buyers.
Sometimes, the two companies will pull off a similar plan, but this time, it will go the other way. They will trade at prices that keep going down instead of prices that keep going up. The plan for this deal is to scare other people who own shares in the security into selling them. This will allow XYZ and ABC to buy many shares at a price that is too low.
The United States has laws and rules that say these so-called “jitney game” activities are illegal because they change the prices of securities.
Conclusion
- The word “jitney” can mean two things based on the situation.
- One is clear-cut; it just means a broker leans on another trader to carry out their trades.
- The other meaning is negative and refers to brokers who work together to take advantage of their clients and other market players differently.
