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. 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.
Wash trading has been illegal in the United States since the passage of the Commodity Exchange Act (CEA), of 1936. The practice is common in non-fungible token markets which have avoided government oversight like cryptocurrencies.
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- "September 25, 1997 order regarding the Securities Exchange Act of 1934".
- "Financial Services Authority" (PDF). www.fsa.gov.uk.
- "Self Trade Prevention Functionality" (PDF). theice.com. September 2013.
- Staff, Investopedia (18 November 2003). "Wash Trading".
- Khalid, A. (4 February 2022). "Traders are selling themselves their own NFTs to drive up prices". Engadget.
- 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].