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A wash trade is a form of market manipulation in which an investor simultaneously sells and buys the same financial instruments to create misleading, artificial activity in the marketplace.[1] First, an investor will place a sell order, then place a buy order to buy from himself, 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.[2]
  • 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.[3]

Some exchanges now have protections built in, sometimes mandatory for participants, such as STPF (Self-Trade Prevention Functionality) on the Intercontinental Exchange (ICE).[4]

Wash trading has been illegal in the United States since the passage of the Commodity Exchange Act (CEA), of 1936.[5]

ReferencesEdit

  1. ^ The New Market Manipulation, 66 Emory Law Journal 1253 (2017)
  2. ^ "September 25, 1997 order regarding the Securities Exchange Act of 1934".
  3. ^ "Financial Services Authority" (PDF). www.fsa.gov.uk.
  4. ^ "Self Trade Prevention Functionality" (PDF). theice.com. September 2013.
  5. ^ Staff, Investopedia (18 November 2003). "Wash Trading".