Wash Trading

Wash trading is an illegitimate process wherein an investor buys and sells a financial instrument with the intent to manipulate the market by spreading misleading information.
Wash trading, also referred to as round trip trading, can increase the trading volume unnaturally to make the security appear as though it is more in demand than it actually is. This is often done to provide brokers with commission fees in order to compensate for securities they failed to settle outright.
In some cases, wash trading is executed by a trader and a broker conspiring to make profits. While at other times, it is performed by traders acting as both the buyer and the seller of a security. Wash trading is unlawful under U.S. law, and the IRS prohibits taxpayers from deducting losses that arise from wash trades from their taxable income.
The IRS has defined a wash sale as one that happens within 30 days of buying the security and leads to a loss.

Wash Trading in Cryptocurrency:

Wash trades can be executed by high-frequency trading companies and cryptocurrency exchanges to manipulate prices.
Wash trading also plays a role in trading at cryptocurrency exchanges. As per the research by the Blockchain Transparency Institute, in 2018, more than 80% of the leading 25 trading pairs for bitcoin at cryptocurrency exchanges were wash traded. Wash trades can also create fake volumes for stocks and pump their price.

Example of Wash Trading:

An example of a wash trade is the LIBOR scandal. A series of fraudulent actions were discovered in London Inter-bank Offered Rate (LIBOR) when wash trade was used to pay off brokers for illegally manipulating the LIBOR submissions for the Japanese Yen.
According to transcripts released by the UK financial authorities, UBS traders carried out nine wash trades with one brokerage firm to generate up to 170,000 pounds in fees to award the company for manipulating LIBOR rates.
Wash trades can also be used to generate fake volumes for stocks and pump their price.

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