Wash trading is a form of

market manipulation In economics and finance, market manipulation occurs when someone intentionally alters the supply or demand of a security to influence its price. This can involve spreading misleading information, executing misleading trades, or manipulating ...

in which an entity 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, creating a false impression of market activity without incurring market risk or changing the entity's market position. Wash trading has been deemed illegal in most jurisdictions. For instance, the United States enacted 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 fu ...

(CEA) in 1936 to prohibit wash trading. To comply with regulations, most regulated stock exchanges have implemented protective measures, such as Self-Trade Prevention Functionality (STPF) on the

Intercontinental Exchange Intercontinental Exchange, Inc. (ICE) is an American multinational financial services company formed in 2000 that operates global financial exchanges and clearing houses and provides mortgage technology, data and listing services. Listed on the ...

(ICE). However, in some unregulated emerging markets, such as

cryptocurrency A cryptocurrency (colloquially crypto) is a digital currency designed to work through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. Individual coin ownership record ...

, the practice is common. Various practitioners engage in wash trading for several reasons. Some examples include: * Artificially inflating trading volume gives the impression that the financial instrument is more in demand than it actually is. * Falsely driving up asset prices by fabricating trade history with increasing prices, particularly in illiquid assets. * Generating commission fees to

broker A broker is a person or entity that arranges transactions between a buyer and a seller. This may be done 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 ...

s as compensation for services that cannot be openly paid for, as demonstrated by some participants in the

Libor scandal The Libor scandal was a series of fraudulent actions connected to the Libor (London Inter-bank Offered Rate) and also the resulting investigation and reaction. Libor is an average interest rate calculated through submissions of interest rates ...

. * Boosting trading volume to create an image of popularity (as a trading platform) to attract customers. Several prevalent wash trading practices include: * Engaging in self-trading by placing bid/ask orders and subsequently filling them, which is particularly effective in low-

liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quic ...

assets such as

non-fungible token A non-fungible token (NFT) is a unique digital identifier that is recorded on a blockchain and is used to certify ownership and authenticity. It cannot be copied, substituted, or subdivided. The ownership of an NFT is recorded in the blockchai ...

(NFT) markets. A study by Advait Jayant found that over 70% of the transaction volumes were attributed to wash trading. It was observed that wash trading had a short-term positive impact on non-wash trading activities on the following day, but this influence became negative over extended periods. Data indicates that from the inception of the market until January 2023, wash trading volumes amounted to approximately $26.88 billion, compared to $10.46 billion in non-wash trades. * Utilizing multiple accounts to facilitate trades between them. * Employing automated trading algorithms for swift, large-scale execution of wash trades or blending these activities with market-making strategies. * Trading platforms forging trading records in their trading history database.

References

Stock market Financial crimes {{investment-stub

See also

References