"Wash Trading", How Repeated Buying and Selling Creates Artificial Activity

Wash trading is a deceptive practice in financial markets where traders repeatedly buy and sell the same asset to create the illusion of increased activity and demand. This tactic is used to mislead other investors into believing an asset is more desirable or liquid than it truly is, manipulating prices and market behavior.

How Wash Trading Works
In a wash trade, the same individual or a group of colluding traders act as both buyer and seller for a given security. These trades often occur rapidly and in large volumes to simulate genuine market activity. Since no real ownership of the asset changes hands, these transactions serve no legitimate economic purpose but aim to:
1. Pump Prices: Creating an artificial price increase to lure unsuspecting investors.
2. Increase Liquidity: Making a security appear actively traded, attracting attention.
3. Conceal Intentions: Masking large trades or reducing tax liabilities in some jurisdictions.

Impact on Markets
Misleads Retail Investors: Wash trading creates false market signals, causing uninformed traders to buy or sell based on fabricated trends.
Market Manipulation: Distorts the true value of assets, leading to inefficient market pricing.
Erodes Trust: Undermines the integrity of financial markets, deterring participation by genuine investors.

How to Spot Wash Trading
1. Unusual Volume Spikes: Watch for sudden surges in trading volume without corresponding news or events.
2. Circular Trading Patterns: Multiple transactions between the same accounts or entities.
3. Price Volatility: Unexplainable rapid price fluctuations over a short time frame.