Securities Trader Representative (Series 57) Practice Exam

Wash trading is defined as a form of market manipulation where a trader simultaneously buys and sells the same security to create the illusion of increased trading activity without any real change in ownership. This practice can mislead other market participants into thinking there is genuine interest in the security, potentially influencing their buying or selling decisions.

Regulatory bodies such as the Securities and Exchange Commission (SEC) in the United States consider wash trading illegal because it can distort market prices and undermine the integrity of the financial markets. Traders engaging in wash trading may do so to create a false perception of demand or liquidity for a security, which can ultimately harm investors who base their decisions on inaccurate information regarding trading volumes and price movements.

Understanding wash trading is crucial for securities traders, as it emphasizes the importance of ethical trading practices and compliance with regulations designed to protect market integrity.