Wash trade is non-genuine transaction. It is a form of stock manipulation in which an investor simultaneously sells and buys the same financial instrument like a stock or commodity.
It is a form of trade in which a transaction or series of transactions gives the appearance that genuine purchases and sales have been made, but the trades have been entered into only to prop up volumes and provide liquidity on the exchange.
It may be done for a number of reasons such as:
- To artificially increase trading volume, giving the impression that the instrument is more in demand than it actually is.
- To increase liquidity on the stock or commodity exchange
- To generate commission or fees to brokers in order to compensate the broker for something that cannot be openly paid for (don’t in case of the LIBOR scandal).
Wash trading is illegal, as it is done in order to manipulate the market and prompt other investors into buying the position. In a wash trade, the share or commodity never really changes owners. And it is different from arbitrage trades.
Note that wash trades are not profitable as both buyer and seller belong to the same group and trades are executed at the same price.
The Rs. 5,600 crore NSEL scam is under investigation for the possibility wash trades being conducted on MCX as per a PWC special audit report.