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.

What makes a wash trade?

Let’s look at the two main factors that would result in a transaction being categorized as a wash trade:

Result- The transaction or series of transactions produce a wash result or in other words there was a purchase and sale of the same instrument at the same price, or, in instances a similar price for accounts with the same or common beneficial ownership.

Intent- The party or parties intended to achieve a wash result. Intent can be surmised by evidence of prearrangement or evidence that the trades were structured; entered or executed in a manner that the party or parties knew or reasonably should have known that the transaction would produce a wash result; and

Ownership

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:

Are independently initiated for permissible and separate business purposes

Initiated by independent decision-makers

Coincidentally cross with each other in the competitive market

Have no prearrangement and the buyer and seller have no knowledge of the other’s order

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.