Wash Trading: The Fake Buzz That Moves Real Market

The Illusion of Demand: What Is Wash Trading?

 

Markets run on trust — trust that prices reflect real supply and demand, and that trades represent genuine investor interest. But what if that trust is being gamed? That’s exactly what happens with wash trading — a scheme where non-genuine trades create the illusion of market buzz, fooling others into thinking something real is happening when it’s not.

 

Ever heard of someone faking interest in a product just to make it seem popular? That’s essentially what wash trading is – but in the world of finance. Wash trading, sometimes called circular or round-trip trading, happens when a trader buys and sells the same asset – sometimes at the same time, sometimes across different platforms – just to make it look like there’s a lot of activity or to push the price up. But here’s the thing: nothing real is happening. No one is gaining or losing anything in the trade, but it sends out misleading signals that can trick other people into jumping in. It’s a way of feeding false information into the market, and that’s why it’s prohibited.

 

Wash trading creates the illusion of market interest without real risk or change in ownership. In some cases, the trader acts on both sides of the deal. In others, it may involve multiple accounts or even coordination between brokers and traders. These trades usually cancel each other out, serving no economic purpose – but the deception can lead to very real consequences for unsuspecting traders. And while it has made its way into the crypto space, wash trading is by no means unique to crypto – it’s actually a very old tactic that dates back to the early stock markets of the 1930s! Today, wash trading can take many forms, from using bots and trading algorithms to inflating numbers on trading platforms. No matter how it’s done, the goal is the same: to make an asset look more desirable than it really is. For everyday investors trying to make smart decisions, that kind of manipulation distorts the truth and undermines trust in the market.

 

Misleading by Design: The Purpose of Wash Trading

 

The main goal of wash trading is to fool people. By quickly buying and selling the same asset, traders make it look like there’s a lot of excitement or demand around it – when in reality, nothing real is happening. This non-genuine activity can trick others into thinking an asset is more popular or valuable than it actually is, which can drive up prices and trading volume. Sometimes it’s done to pump up prices before dumping the asset on unsuspecting buyers (part of a classic pump-and-dump move). Other times, it’s to make a trading platform seem more active and appealing to potential users. In some shady setups, it even helps disguise payments to brokers for things like insider access or special treatment.

 

Wash trading is also used to artificially inflate the price of an asset – especially those with low liquidity – by fabricating a trading history that makes it seem like prices are steadily climbing. This illusion of growth can draw in unsuspecting investors, especially those who are newer to the market or unaware of wash trading tactics. The inflated volume may also trigger automated trading bots, giving the illusion of momentum where none exists.

 

At the end of the day, wash trading is market manipulation designed to mislead others for personal gain. That’s why it’s not just unethical – it’s illegal. It creates an unfair playing field, exposes honest investors to unnecessary risk, and can destabilize the market when the inflated value collapses. What might look like a booming market could be built on nothing but smoke and mirrors.

 

Case Study: When Wash Trading Gets Caught

 

To see just how serious wash trading can be, let’s look at a real-world example. Back in 2014, the U.S. Commodity Futures Trading Commission (CFTC) fined the Royal Bank of Canada (RBC) a hefty $35 million after uncovering that the bank had carried out more than 1,000 illegal wash trades over a three-year period. These weren’t just small errors or technical mix-ups – RBC was intentionally buying and selling the same assets between its own entities, creating non-genuine market activity. Why? In part, to score tax benefits.

 

The court found that senior RBC staff had actually planned this strategy. They structured trades in a way where the bank acted as both the buyer and the seller, ensuring the trades canceled each other out. No real risk. No real gain. Just a bunch of phony transactions that made it look like there was active trading happening. The result? A misleading picture of market activity that could have influenced real investors.

 

As the CFTC’s Director of Enforcement put it: “Illegal wash trades may seem innocuous. They are not. They provide misleading signals to the market and are thus prohibited, whether their purpose is to lessen a foreign tax bill or another reason.” They trick the market, mislead other traders, and chip away at trust in the financial system. This case shows that even major institutions can – and do – get caught for this kind of market manipulation.

 

Stay Smart: Tips to Avoid Falling Victim to Market Manipulation Using Wash Trading

Wash trading is meant to be hard to spot – it’s all about creating the illusion of interest or demand when there’s none. But with a little awareness, there are ways to protect yourself:

 

  • Watch for red flags:
    • Unusually high trading volumes without any clear reason - especially when there’s no relevant news or market driver.
    • Strange price movements that don’t match broader market trends.
    • Suspicious trading patterns, like the same trader (or group) buying and selling the same asset at the same time.
  • Stick to reputable platforms: Choose regulated platforms like Kraken, which invest in advanced monitoring tools to detect and discourage suspicious activity.
  • Do your own research: Take time to understand the fundamentals of an asset — such as the team behind it, its use case, roadmap, and real-world adoption. When you know what drives an asset’s value, it’s easier to spot when price movements or trading volumes don’t align with reality, which can be a red flag for manipulation like wash trading.
  • Stay informed: The more you understand how markets typically behave, the easier it is to recognize when something seems off — like signs of manipulation or wash trading. This awareness helps you avoid being misled into making risky or uninformed investment decisions.

 

Our Efforts to Support Fair and Transparent Trading

At Kraken, we take proactive steps to help support a trading environment that’s fair and secure. Here’s how we work to discourage illegal practices like wash trading:

 

  • Advanced Monitoring Tools: Unusual activity is investigated and reported on.
  • Detailed Recordkeeping: Every trade is carefully logged with timestamps, order details, and account info, while strong data protection measures help keep that information secure.
  • Employee Training & Ethical Standards: Our specialized team undergoes regular training on market abuse risks and follows a clear code of conduct that outlines expected ethical behavior.
  • Whistleblower Support: We’ve established a whistleblower policy so employees can report concerns confidentially and without fear of retaliation. Clients can also contact us via Kraken’s Support Center if they believe someone is engaging in market abuse, fraud, or other prohibited activities.
  • Regular Audits & Reviews: We run frequent internal checks and also work with independent third-party auditors to review our systems and stay aligned with industry best practices.
  • Active Regulatory Engagement: We stay up-to-date with evolving regulations and maintain open lines of communication with regulators to adapt quickly and responsibly.

 

Your trust is essential to a healthy market. That’s why Kraken works continuously to maintain a secure, transparent, and fair platform — one where traders can operate with confidence. Wash trading distorts prices and undermines confidence – but you don’t have to navigate it alone. Kraken actively monitors for manipulation, collaborates with regulators, and applies strict standards to support a fair and transparent market.