Fictitious Trade

A fictitious trade is a trade that is booked with an execution date far in the future, and is adjusted to include the correct settlement and trade date when the transaction is completed. A fictitious trade is used in the processing of a securities transaction as a form of placeholder, and is found when open dates or rates are being used.

It also refers to a securities order used to affect the price of a security, but which does not result in shares being competitively bid for and no real change in ownership. Wash sales and matched orders are examples of fictitious trades. A fictitious trade is designed to give the impression that the market is moving in a certain direction, when in fact it is being manipulated by a broker.

For example, two companies enter into a series of ongoing transactions whose values are based on an interest rate set each week. Because the interest rate can change from week to week, an open execution date is used for the transaction until the interest rate is announced. Two transactions are recorded. The first is a cash transaction with a settlement date (the same as the trade date); the second transaction has the same trade date, but with a settlement date for several weeks later. Each week, the second transaction is updated to include the correct interest rate and settlement date.

UBS trader Kweku Adoboli was convicted of two counts of fraud in 2012 after his fraudulent trades led to losses of $2.3 billion when he was working in the London office. The losses were incurred primarily on exchange traded index future positions and were the largest unauthorized trading losses in British history. His underlying positions were disguised by the employing late bookings of real trades, booking fictitious trades to internal accounts and the use of fictitious deferred settlement trades, explained the British Financial Services Authority (FSA). The FSA fined UBS AG (UBS) £29.7 million (about $40.9 million), the third largest fine the regulator had imposed in its history, for systems and controls failings that allowed an employee to cause substantial losses as a result of unauthorized trading.