A wash trade is a form of
market manipulation
In economics and finance, market manipulation is a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market; the most blatant of cases involve creating false or misleading appearances ...
in which an
investor
An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...
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
broker
A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be con ...
s 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
Intercontinental Exchange, Inc. (ICE) is an American company formed in 2000 that operates global financial exchanges and clearing houses and provides mortgage technology, data and listing services. Listed on the Fortune 500, S&P 500, and Russ ...
(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 fut ...
(CEA), of 1936. The practice is common in
non-fungible token
A non-fungible token (NFT) is a unique digital identifier that cannot be copied, substituted, or subdivided, that is recorded in a blockchain, and that is used to certify authenticity and ownership. The ownership of an NFT is recorded in the b ...
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 stock, 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 b ...
*
Round-tripping (finance)
Round-tripping, also known as round-trip transactions or "Lazy Susans", is defined by ''The Wall Street Journal'' as a form of barter that involves a company selling "an unused asset to another company, while at the same time agreeing to buy back t ...
*
Substance over form
Substance over form is an accounting principle used "to ensure that financial statements give a complete, relevant, and accurate picture of transactions and events". If an entity practices the 'substance over form' concept, then the financial sta ...
*
Pump and dump
Pump and dump (P&D) is a form of securities fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price. Once the operat ...
References
Stock market
Financial crimes
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