What Is a Jitney?
In finance, the term jitney refers to a broker that does not have direct access to an exchange and therefore relies on another broker with exchange access to execute their trades.
The term can also reflect a type of market manipulation where brokers trade securities back and forth to earn commissions and artificially enhance the appearance of high trading volume.
Key Points to Remember
- The term ‘jitney’ has two meanings, one neutral and one negative.
- The neutral meaning involves brokers relying on other brokers for transaction execution.
- The negative meaning involves collusion between brokers to manipulate the market and exploit other participants.
Understanding Jitneys
Depending on the context, the term jitney can have neutral or negative connotations. A neutral situation involves brokers using other brokers to execute trades, which is generally acceptable. However, there have been instances where brokers collude to generate commission revenues fraudulently or mislead market participants about the demand for a security.
This activity, also known as circular trading, account churning, or a “jitney game,” involves repeatedly buying and selling a security to increase its transaction volume. These schemes often revolve around securities with low liquidity and small market capitalizations, such as penny stocks. Although illegal, these practices can mislead investors, further tainting the term jitney.
Real World Example of a Jitney
XYZ Corporation, a brokerage with direct exchange access, occasionally executes trades for another broker, ABC Financial, which doesn’t have exchange access. However, XYZ and ABC sometimes engage in more dubious practices to increase their commission revenues. For instance, they might make repeated transactions between their firms to fabricate trading volume and mislead investors.
In other instances, XYZ and ABC might repeatedly trade penny stocks at increasing prices, misleading others into believing it’s due to genuine market interest and drawing in unsuspecting buyers. Alternatively, they may drive down prices through successive trades, scaring other investors into selling their shares at undervalued prices, which XYZ and ABC then buy at a profit.
These manipulative activities, known as “jitney games,” are prohibited by financial regulations.
Related Terms: brokerage, exchange, trading volume, penny stocks, market capitalizations.
References
- U.S. Securities and Exchange Commission. “Market Manipulation”.
