Wash Trading Law and Legal Definition

Wash trading refers to entering into, or purporting to enter into, transactions to give the appearance that purchases and sales have been made, without incurring market risk or changing the trader's market position. It is an illegal stock trading practice where an investor simultaneously buys and sells shares in a company through two different brokers. The Commodity Exchange Act prohibits wash trading. It is also called Round Trip Trading.

A wash trade is a transaction made without an intent to take a genuine, bona fide position in the market, such as a simultaneous purchase and sale designed to negate each other so that there is no change in financial position. Wash trades may be used, inter alia, to avoid margin requirements, to rearrange gains and loss for tax purposes, or to manipulate prices. [Reddy v. CFTC, 191 F.3d 109 (2d Cir. 1999)].