What exactly is a wash trade? A wash trade is a form of fictitious trade in which a transaction or a series of transactions give the appearance that authentic purchases and sales have been made, but where the trades have been entered without the intent to take a bona fide market position or without the intent to execute bona fide transactions subject to market risk or price competition.
Parties who initiate, execute or accommodate transactions which they know, or reasonably should know, will achieve a wash result have violated Rule 534. This would also include where the execution of the trade was for moving positions or correcting an error. Moving positions should be handled via a trade transfer, where permissible, pursuant to Rule 853.
Market participants are reminded, that the rules of all CME Group exchanges, as well as the Commodity Exchange Act, section 4c.(a), prohibit wash trades. Firms and market participants should carefully review their operations and the associated MRAN (“Market Regulation Advisory Notice”), and, where appropriate, take the necessary steps to minimize the potential for wash trade practices.
Let’s look at the two main factors that would result in a transaction being categorized as a wash trade:
What does it mean to have accounts with the same or common beneficial ownership?
Accounts with the same beneficial ownership include accounts with identical ownership as well as accounts of different entities that are 100% wholly-owned by the same parent.
Common beneficial ownership is more comprehensive and includes not only accounts with the same beneficial ownership, but also accounts with common beneficial ownership that is less than 100%.
While we are on the topic of ownership, buy and sell orders for accounts with common beneficial ownership may not be deemed wash trades if the orders:
Trades between accounts with common beneficial ownership may draw additional regulatory scrutiny. Market Regulation expects market participants, if requested, to demonstrate that such trades are bona fide and for legitimate purpose.
This is part of a course on wash trades. For official regulatory guidance on wash trades, reference the applicable Market Regulation Advisory Notice.