
Defining the Characteristics of a Wash Trade
Wash trades represent a serious market violation. Specifically, a wash trade is a fictitious transaction. It creates the illusion of genuine market activity. However, it lacks any intent to establish a real market position. Consequently, these trades avoid authentic market risk and price competition.
Furthermore, initiating or executing a wash trade violates Rule 534. This prohibition includes trading to move positions or correct errors. Instead, such actions require a formal trade transfer under Rule 853. Therefore, understanding this distinction is crucial for compliance.
Moreover, CME Group exchanges and the Commodity Exchange Act strictly prohibit wash trades. Firms must therefore carefully review their operations. They should also consult the relevant Market Regulation Advisory Notice. Subsequently, necessary steps must be taken to minimize any potential for wash trading.
Ensuring Compliance to Avoid a Wash Trade Violation
Two primary factors define a wash trade. First is the result: a purchase and sale occur at the same or similar price. Crucially, this involves accounts with common beneficial ownership. Second is the intent: parties must intend to achieve this wash result. Intent is often inferred from evidence of prearrangement or structured trading.
Regarding ownership, the same beneficial ownership means identical or 100% wholly owned accounts. Common beneficial ownership is broader and includes any shared ownership below 100%. Consequently, trades between these accounts face heightened regulatory scrutiny.
However, not all such trades are violations. Legitimate crosses may occur if orders are independent. They must also serve separate business purposes. Additionally, independent decision-makers must initiate them. They must cross coincidentally in the competitive market. Finally, there must be no prearrangement or prior knowledge between parties.
In summary, market participants must be able to demonstrate a legitimate purpose for such trades. This is essential for maintaining market integrity and regulatory compliance.
Note: This is for educational purposes. Always consult the official Market Regulation Advisory Notice for definitive guidance.
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