What is Wash Trading
Wash trading is an illegal market manipulation practice where an investor simultaneously buys and sells the same financial instrument to create false trading volume and mislead other market participants.
Main characteristics:
đ”The investor conducts trades with themselves or with a prearranged partner to create the appearance of market activity.
đ”The goal of wash trading is to create a false impression of high demand or supply, which can influence other traders' decisions to buy or sell assets.
đ”Wash trading is an illegal practice and is prohibited by many regulatory bodies worldwide as it undermines market integrity and transparency.
Mechanism of wash trading:
đ”Creating buy and sell orders: The investor places buy and sell orders for the same asset at similar prices.
đ”Executing trades: Trades are executed between accounts of the same investor or between colluding parties.
đ”Creating an illusion of volume: These trades artificially increase trading volume and can affect market prices, creating a false impression of liquidity and demand for the asset.
Wash trading undermines trust in financial markets and distorts the true picture of market activity. Therefore, strict regulatory and monitoring measures are essential to protect the integrity and transparency of trading.