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Wash Trade

A wash trade is an illegal practice where an investor simultaneously buys and sells the same financial instrument to create the appearance of activity and artificially inflate trading volumes, without any real change in ownership. Wash trading can mislead market participants about the true demand for a security, distorting price movements. It is prohibited by regulators because it creates false market activity and undermines market integrity.

Example

A trader buys 1,000 shares of a stock and simultaneously sells 1,000 shares of the same stock, creating the illusion of market activity without changing their net position.

Key points

• An illegal trading practice where an investor simultaneously buys and sells the same asset to create the appearance of market activity.

• Aims to artificially inflate trading volumes and mislead other market participants.

• Prohibited by financial regulators as it distorts true market demand and price signals.

Quick Answers to Curious Questions

It creates artificial market activity that can mislead other traders and distort price movements, undermining market integrity.

It can create the illusion of increased demand or supply, leading other traders to make decisions based on false information.

Traders caught engaging in wash trades may face regulatory penalties, including fines and possible bans from trading.
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