Wash Trade Rules - Are You Aware of Them? - YouTube

In today’s video I will discuss Wash trade  rules. You will learn what is a wash trade,  

why people are doing it and I’ll  bring up also a practical example  

of a wash trade. So let's  jump right into today's video.

Hi, and welcome to FinCrime Agent my YouTube  channel where every week I publish a new video  

to boost your awareness about AML  and Financial Crime prevention.

Let's start by discovering what is Wash trading

Wash trading, which is also known  as round trip trading or even wash sale,  

is an illegal trading technique that essentially  consists of buying and selling a financial asset  

or commodity (or multiple assets or commodities)  during a considerably short period of time.

Usually, the main purpose of wash trading is to  create the illusion that there is a fake demand  

for those assets traded and therefore increasing  or decreasing the market value of those assets.

This is considered a form of market manipulation  as it would influence the price of assets unfairly  

for other traders, as a result  of those fake trading activities.

Another reason why wash trade can  take place is to illegally generate  

extra fees for brokers. The  method used is the same:  

buying and selling the same assets or shares in  a short period of time. However in this instance  

the main objective is to generate more commissions  that will end up in the brokers’s pockets.

A wash trade scheme like the one I just  mentioned was seen for example in the Libor  

case. The illegal was trade activities linked to  this investigation were brought to light in 2012,  

where several international institutions were  accused of using wash trade transactions with  

the aim to collude and manipulate the  Libor rate over a number of years.

So let's see what is required for  transactions to be classified as wash trades

As I just mentioned a Wash Trade  implies that an investor buy  

and sell assets or securities  within a short timeframe.  

However, the definition of wash trades takes into account two fundamental elements  

in order for a wash trade to be classified as such: - The first one is the intent.

Those parties participating in a wash trade must have intended for at least one person involved in  

the transaction to do so explicitly for that purpose.  And when I say parties I mean the broker  

or the investor that are trading those assets.

- The second element is the result.

The transaction must effectively result in a wash  trade. This implies the investors bought and sold  

the same asset for account holders with the same  or common beneficial ownership at the same time.

The level of risk that is presented to  the investor as part of his or her trading  

activity is another angle that you can use for  your understanding what could be classified  

as wash trade activities.

An easy rule of thumbs is that essentially a trade  is considered a wash if it does not change the  

traders’ overall market position in the security  or expose them to any type of market risk.

So, are Wash Trade operations illegal?

Yes, wash trade is indeed an illegal trading  practice. From a law perspective you can refer  

to several regulations forbidding was trade  activities. The Commodity Exchange Act section  

4c.(a) for example, clearly prohibits wash trades.  Also another reference at regulation level on wash  

trade is provided by the Commodity Futures Trade  Commission as they define wash trade rule as:

"Entering into, or purporting to enter into,  transactions to give the appearance that purchases  

and sales have been made, without incurring market  risk or changing the trader's market position."

Before we dive into how to avoid ending up  breaking wash trade rules, if you are finding  

valuable this video, make sure you subscribe  to FinCrime Agent and press the thumb up. This  

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Wash trade example

Let’s now see a practical example of a wash trade. In this example we have a stock trader called Sam,  

and a brokerage firm that are  orchestrating together market manipulation.  

They are buying and selling stock of  company ZZY in a short period of time.  

Investors on the market will start to see the  increased volume of trading activities for the ZZY  

stock and they will also decide to buy more shares  of company ZZY. While genuine investors are buying  

more assets or shares in company ZZY of course  its price will go up, and Sam the trader will make  

profits from the increased price. Sam will then  be in the position to also short-sells ZZY stock,  

further profiting from the declining price of ZZY  as he stops his illegal wash trading operations.

As you have learned by now, wash trading is  prohibited and is an illegal trading practice,  

but sometimes it can be quite simple for an  investor to slip into the wash trade trap  

unintentionally, particularly  when it's time to accept losses.

As a result, in order to  avoid making an illegal trade,  

you must pay great attention when  you acquire and sell your assets.

If you are an investor, being  aware of what makes a wash trade  

is the easiest method for you to prevent  and avoid being involved in wash trading.

So - do your own learning, remain informed and be  sure to know the rules to avoid breaking the law.

One final note is that in this video I  covered wash trade rules with examples and  

references specific to the stock market  but this is also a scheme that has been  

present quite heavily also  across the cryptocurrency sector,  

with crypto traders adopting pretty much  the same principle highlighted in my video.

****And with that I am now at the end of  this vide focused on wash trade rules.  

Please leave any feedback or comments  about my video in the comments down below.

Also, remember to check the  description of this video  

to find links and references from my research  on the wash trade rules. You will also  

see there a link to my Patreon page  where you can receive receive copies  

of my presentations and support the  development of my FinCrime Agent project.

Lastly, thank you for watching, I hope you enjoyed  today’s video and until next time: See you soon!