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A wash trade refers to a fictitious or non-genuine transaction in which trades are executed to create the illusion of legitimate market activity. In reality, such trades are carried out without the intent to assume a genuine market position or to engage in transactions that involve actual market risk or fair price competition.
Under Rule 534, any individual or firm that initiates, executes, or facilitates transactions they know—or reasonably should know—will result in a wash outcome is in violation. This includes instances where trades are placed solely to move positions or correct errors. In such cases, transfers should be conducted through a proper trade transfer process as outlined in Rule 853.
Both the Commodity Exchange Act (Section 4c.(a)) and the rules governing CME Group exchanges explicitly prohibit wash trades. Market participants and firms are therefore urged to review their operations in line with the applicable Market Regulation Advisory Notice (MRAN) and to implement safeguards that minimize the risk of wash trading practices.
What Constitutes a Wash Trade?
Two main elements typically define a wash trade:
1. Result – The transaction, or series of transactions, creates a wash outcome. This occurs when the same instrument is simultaneously bought and sold at the same—or nearly the same—price across accounts with identical or common beneficial ownership.
2. Intent – The parties involved intended to generate a wash result. Intent may be inferred from evidence of prearrangement, or if trades were structured, entered, or executed in a way that the parties knew, or reasonably should have known, the outcome would be a wash trade.
Ownership in the Context of Wash Trades
What does it mean when accounts are described as having the same or common beneficial ownership?
* Same beneficial ownership refers to accounts that share identical owners, as well as accounts belonging to different entities that are each 100% wholly owned by the same parent company.
* Common beneficial ownership is broader, encompassing accounts with identical ownership as well as those that share overlapping ownership interests of less than 100%.
When Are Trades Between Such Accounts Not Considered Wash Trades?
Buy and sell orders between accounts with common beneficial ownership may not automatically qualify as wash trades if the following conditions are met:
- The orders are entered independently for valid and separate business purposes.
- Each order is initiated by independent decision-makers.
- Any matching of orders occurs coincidentally through the competitive market.
- There is no prearrangement, and neither party has knowledge of the other’s order.
Regulatory Considerations
Even when these conditions are met, trades involving accounts with common beneficial ownership are likely to attract additional regulatory scrutiny. Market regulation may require participants to provide evidence that such trades are legitimate, independently initiated, and conducted for bona fide purposes.
This material is part of a training course on wash trades. For definitive guidance, participants should consult the applicable Market Regulation Advisory Notice (MRAN) and relevant regulatory rules.
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