Wash Trading
The illegal practice of simultaneously buying and selling the same security to create artificial trading volume or misleading price activity.
What is Wash Trading?
Wash trading involves entering offsetting buy and sell orders for the same security — either by the same trader or through coordinated accounts — to simulate market activity without a genuine change in economic ownership. The practice artificially inflates reported trading volume, can mislead other investors into thinking a security is more liquid or trending than it is, and may be used to manipulate prices or generate fraudulent tax losses. Wash trading in US securities markets is prohibited by the Commodity Exchange Act and the Securities Exchange Act of 1934, and is actively investigated by the SEC and CFTC. It is also prevalent in cryptocurrency markets, which have less regulatory oversight.
Example
A 2022 academic study estimated that over 70% of reported cryptocurrency spot trading volume on unregulated exchanges consisted of wash trading. On regulated US stock exchanges, surveillance systems flag accounts with suspiciously self-offsetting order patterns for SEC investigation.