What is a wash trade?

What is a wash trade?

• A. A trade that involves multiple parties
• B. Selling and repurchasing the same security
• C. A trade that cancels out another trade
• D. A trade that is executed out of market hours

Answer: (B)

A wash trade refers specifically to the act of selling and then repurchasing the same security, effectively creating the appearance of trading activity without a true change in ownership or position. This practice is typically intended to manipulate the market or create misleading signals about the liquidity or activity of a security. By executing this type of trade, an individual or entity can give an illusion of high trading volume, which could attract other investors or affect the security's price without actually impacting their economic position.

The focus on selling and repurchasing the same security is crucial, as this underpins the definition of wash trading and illustrates why it is considered problematic and often illegal within many regulatory frameworks. It's important for participants in the market to understand the ramifications of such practices, as they can undermine market integrity.