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What Is Wash Trade And Why Is It Carried Out?

In markets, when investors buy and sell the same financial assets on their own to create an unnatural and misleading activity, it is called a wash trade.

The overall objective of wash trading is not to generate a profit or return but to manipulate the market by altering the balance of supply and demand with misleading data and inputs.

Trading volumes are one of the most important indicators in financial markets. Trading volume is one of the most important data parameters considered by investors. Low trading volume indicates that the markets are stagnating. On the other hand, high trading volume indicates that there are a lot of traders in the market and that the market has become more liquid. Wash trades increase this trading volume by artificially manipulating it. It gives other investors the impression that the market or the asset has trading volume and liquidity that does not exist.

Why Is Wash Trade Carried Out?

Wash trades are buy and sell transactions on a financial instrument or asset. These wash trades, which are repeated over and over again, have no commercial value as they cancel each other out. The investor who executes a wash trade cannot make any profit. Moreover, at the same time, this investor may even incur losses due to the transaction fees paid while executing wash trades.

It is another indication that wash trades are carried out for the purpose of manipulation.

Wash trades are consistent with each other in terms of prices and trading volume size. These wash trades are executed continuously and repeatedly by the investor who wants to manipulate the market. As a result of wash trades, there is no change in the number of assets of the investor. At the same time, while there is no change in the number, investors who execute wash trades may incur small financial losses due to the transaction fees in the market.

One of the most frequently used data and information by traders is trading volume. The trading volume can be manipulated easily through wash trade-like transactions. Investors who observe the trading activity in financial assets may decide to invest based on such manipulations. It is  the aim of wash traders. As the trading volume artificially grows, new investors will enter the market.

Wash trading is not just a transaction that one person can execute between his/her accounts. It can also be carried out by groups of people who are organized with each other.

These people, who are aware of each other through different accounts, try to expand their trading volume by repeating the same transactions.

Investors who fall for wash trade manipulations can suffer losses that are directly proportional to their investments. For this reason, staying away from assets with inflated volumes in wash trades can be a way to avoid these losses. It may also be worthwhile to seek the advice of market experts and analysts.

Wash trading is prohibited in many countries. At the same time, in many countries, serious penalties and sanctions are imposed on individuals who engage in wash trading. In the United States, wash trading was first strictly prohibited by the federal government in 1936 with the "Commodity Exchange Law." It is also illegal to engage in wash trading in Turkey.

Such preventive laws do not yet cover cryptocurrencies, as they were created and enacted long before the emergence of cryptocurrencies. In addition, even if the regulation and legislative work on crypto assets continues in some countries, it remains unclear when it will be the turn of wash trades. There are widespread allegations of frequent wash trades, especially in the NFT market.

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