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What is Daisy Chaining?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 22 August 2016
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    2003-2016
    Conjecture Corporation
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In investing, daisy chaining is a strategy that involves creating a false impression of the movement of a given security. The process of daisy chaining calls for the creation of a series of transactions that make the security to appear more active than it actually is. This appearance of robust movement makes the security more appealing to investors and may in turn spark genuine interest that creates real movement.

While the practice of daisy chaining was once very common, that is no longer the case. Many nations have enacted legislation that defines this strategy as being illegal. There are two main reasons that governmental regulations prohibit the use of daisy chaining. First, the strategy calls for the development of a series of transactions that are not genuine. Because daisy chaining is based on the creation of a false impression, the method may have some degree of impact on the natural activity on similar securities.

Second, the goal of daisy chaining is not always the result. While the strategy is to create genuine movement by creating a perception of activity already taking place, the exact opposite may occur. When the false momentum created by the daisy chaining attracts a few investors, they may quickly find their investment rapidly dropping in value once the false transactions are discontinued. The end result is that investors may lose a great deal of money based on false information that was intentionally made available to the trading community.

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The creation of this type of illegal brokering scheme requires the participation of both brokers and investors. An investor who wishes to stimulate the activity on a given security in order to raise the price per unit and then sell at a profit may work hand in hand with a broker to create an illusion of an upswing in value for the security. When several investors and brokers are involved in the project, they are referred to as a daisy chain.

While the name for the strategy may appear to be simply colorful, there are some similarities between an actual necklace or chain made of daisies and the daisy chaining of a given security. In both cases, the daisy chain is quite attractive to the eye. For a period of time, both chains will seem to function very well and generate some degree of interest. Ultimately, both daisy chains begin to weaken and eventually fall apart, leaving behind little or nothing of value.

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