Jump to content

Wash trade

From Wikipedia, the free encyclopedia

This is an old revision of this page, as edited by 192.12.184.7 (talk) at 17:35, 31 July 2023. The present address (URL) is a permanent link to this revision, which may differ significantly from the current revision.

Not to be confused with Wash sale.

Wash trading is a form of market manipulation in which an entity simultaneously sells and buys the same financial instruments, 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 (CEA) in 1936[1] 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 (ICE).[2] However, in some unregulated emerging markets, such as cryptocurrency,[3][4][5] the practice is common.

Various practitioners engage in wash trading for several reasons. Some examples include:

  • Artificially inflating trading volume to give the impression that the financial instrument is more in-demand than it actually is.[6]
  • Falsely driving up asset prices by fabricating trade history with increasing prices, particularly in illiquid assets.[4]
  • Generating commission fees to brokers as compensation for services that cannot be openly paid for, as demonstrated by some participants in the Libor scandal.[7]
  • 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 assets such as non-fungible token (NFT) markets.
  • 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.[3]
  • Trading platforms forging trading records in their trading history database.

See also

References

  1. ^ Staff, Investopedia (18 November 2003). "Wash Trading".
  2. ^ "Self Trade Prevention Functionality" (PDF). theice.com. September 2013.
  3. ^ a b Cong, Lin William; Li, Xi; Tang, Ke; Yang (December 2022). "Crypto Wash Trading". {{cite journal}}: Cite journal requires |journal= (help)
  4. ^ a b von Wachter, Victor; Jensen, Johannes Rude; Regner, Ferdinand; Ross, Omri (2022-02-07). "NFT Wash Trading: Quantifying suspicious behaviour in NFT markets". arXiv:2202.03866 [cs.CR].
  5. ^ Khalid, A. (4 February 2022). "Traders are selling themselves their own NFTs to drive up prices". Engadget.
  6. ^ "CFTC Orders Coinbase Inc. to Pay $6.5 Million for False, Misleading, or Inaccurate Reporting and Wash Trading | CFTC". www.cftc.gov. Retrieved 2023-03-29.
  7. ^ "Financial Services Authority" (PDF). www.fsa.gov.uk.


This article about investment is a stub. You can help Wikipedia by expanding it.

Retrieved from "https://en.wikipedia.org/w/index.php?title=Wash_trade&oldid=1168080705"