If an algorithm or Automated Trading System (ATS) generates buy and sell orders that would potentially match against each other, and these trades occur on more than an incidental basis relative to other algorithmic or market activity, the trades may be deemed to violate the prohibition on wash trades.
Additionally, if an individual or team of individuals operate independent algorithms or ATSs, and these ATSs trade against each other on more than an incidental basis, then the trading may be deemed to violate the prohibition on wash trades.
Market participants that are responsible for the operation of algorithms or ATSs should strongly consider employing automated functionality to minimize the potential for either of these scenarios from occurring.
Firms have an obligation to supervise the trading by their employees and algorithms and must be able to demonstrate the independence of the traders, trading groups and algorithms when self-matching occurs.
Firms should also have and enforce policies and procedures that preclude the traders from having access to or knowledge of one another's orders.
This is part of a course on wash trades. For official regulatory guidance on wash trades, reference the applicable Market Regulation Advisory Notice.