A wash trade is a form of
market manipulation in which an
investor simultaneously sells and buys the same
financial instrument
Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in the form ...
s to create misleading, artificial activity in the marketplace. First, an investor will place a sell order, then place a buy order to buy from themselves, or vice versa. This may be done for a number of reasons:
* To artificially increase trading volume, giving the impression that the instrument is more
in-demand than it actually is.
* To generate commission fees to
brokers in order to compensate them for something that cannot be openly paid for. This was done by some of the participants in the
Libor scandal.
Some exchanges now have protections built in, sometimes mandatory for participants, such as STPF (Self-Trade Prevention Functionality) on the
Intercontinental Exchange (ICE).
Wash trading has been illegal in the United States since the passage of the
Commodity Exchange Act
Commodity Exchange Act (ch. 545, , enacted June 15, 1936) is a federal act enacted in 1936 by the U.S. Government, with some of its provisions amending the Grain Futures Act of 1922.
The Act provides federal regulation of all commodities and futu ...
(CEA), of 1936. The practice is common in
non-fungible token markets which have avoided government oversight like cryptocurrencies.
See also
*
Bucket shop (stock market)
A bucket shop is a business that allows gambling based on the prices of stocks or commodities. A 1906 U.S. Supreme Court ruling defined a ''bucket shop'' as "an establishment, nominally for the transaction of a stock exchange business, or busine ...
*
Round-tripping (finance)
*
Substance over form
*
Pump and dump
References
Stock market
Financial crimes
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