Wash Trade

A wash trade is a transaction where the buyer and seller are the same party or colluding parties, creating the appearance of real trading activity without changing beneficial ownership. Wash trades are prohibited in many markets because they can mislead participants.

Why it matters

• Artificially inflates volume.
• Distorts price discovery.
• Can be used to manipulate perceived liquidity.

Example

A trader buys and sells the same security through related accounts to create the impression of active trading. The net position does not change, but reported volume increases.

Regulatory context

Exchanges and regulators monitor for wash trades and can impose penalties or bans. Surveillance systems look for linked accounts and suspicious patterns.

Practical notes

Legitimate activity such as internal transfers can be mistaken for wash trades without proper documentation.