intermediate
The cryptocurrency market is still very young, and it is in the process of developing. It means that scammers still have many loopholes caused by the lack of regulation. Manipulation harms the market and all of its participants. However, although such actions are prohibited, they still occur and may be hard to be detected.
In this article, we take a closer look at one of the forms of market manipulation — wash trading.
What Is Wash Trading?
Wash trading (WT) is a form of market manipulation when an investor or institution simultaneously sells and buys the same cryptocurrencies to create artificial activity in the market, which, in turn, misleads other market participants.
For the crypto market participants, such a scheme poses a serious threat. Mainly because no one will support fictitious trading forever: sooner or later, it will stop, which means that trading volumes will drop sharply, invariably resulting in a price drop. Such manipulations make the market more volatile, chaotic, and dangerous for novice investors.
What Actions Are Considered as Wash Trading?
Wash trading can be practiced by a trader (self-trading) or a group of traders (collusion) who buy and execute their own orders for a particular coin/token creating the fictional trading activity for the said crypto.
In other words, WT artificially inflates the trading volume of any traded assets on the exchange. To use the WT mechanisms, one party becomes both a buyer and a seller. Such actions, combined with the regular trading volume on the exchange, will create an illusion that there is a lot of trading activity on the market.
What if I accept an order (buy and sell) for simultaneous execution in the same cryptocurrency? Is it wash trading?
According to the statements provided by the commission that regulates the U.S. derivatives markets – Commodity Futures Trading Commission (CFTC) – and that can also be applied to the crypto market, market participants may be found to have intentionally engaged in wash trades in case they contribute to a wash result without sufficient investigation into the correctness of such orders before their execution. Moreover, the failure of a market participant to conduct such an investigation may be taken as evidence of knowing participation in wash trades.
What if the ownership of the accounts is common but not identical? Will such accounts be banned?
Common ownership of the accounts often refers to a situation where companies, enterprises, or any other organized group of market participants.
If the ownership of the accounts is common but not identical (each part of the group possesses less than 100% of common ownership), prohibitions still apply in case the purpose of the orders is to negate market risk or price competition/fluctuation.
Can I accept an instruction to liquidate a position and then re-establish a new position?
You can liquidate a position and then re-establish a new position in case you do not require the liquidation and reinstatement of a position to be executed simultaneously.
Under what circumstances is trading with oneself in the order book a violation and can be considered as wash trading?
Trading with oneself in the order book is a violation and can be considered as wash trading if the market participant knew or should have known their order would match with an order on the other side of the market for an account with common beneficial ownership.
Bottom Line
As for investors and traders, knowing the dangers and the ways to avoid them will save a lot of money and help to relieve stress. Trade responsibly and thoughtfully — do not make decisions based on a sudden change in the market.
The Changelly PRO team has always fought and will continue to fight against wash trading in order to provide our users with access to a fair and transparent trading environment.
