Allegations of wash trading can occur for every market and financial instrument.
Wash trading (also referred to as “round-trip trading” or “prearranged trading”) creates the appearance of purchases and sales without incurring market risk or changing the trader’s market position.
Our experience includes:
- Assessing and quantifying alleged damages as well as evaluating other potential explanations for observed trading behavior.
- Evaluating pairs of similar trades to assess how they fit with purported trading strategies and techniques.
- Utilizing proprietary as well as publicly available data to assess in-depth trading behavior in the context of varying market conditions, as well as financial institutions’ risk management and market making activity.
- Evaluating any potential impact of alleged trading on other market participants.
- Assessing the impact of market participants’ trading on the underlying products.
- Analyzing trading behavior in the context of intraday hedging and risk management, market making, and the execution of client orders.
- Evaluating volume integrity of exchanges and markets.
Select Experience
Energy
Cornerstone Research evaluated and rebutted allegations of Commodity Exchange Act (CEA) violations resulting from allegedly improper burst and churn trading by a large energy trading firm on a prominent electronic trading platform. For several energy trading firms, Cornerstone Research has investigated allegations of CEA violations through improper wash or round-trip trading. This analysis involved evaluating inadvertent or intentional trades and the potential impact of alleged trading.
Cryptocurrencies
Cryptocurrencies can be traded like other financial products. Even though official regulation governing cryptocurrency exchanges has not yet been implemented, many exchanges have imposed their own rules to prevent abusive trading conduct. A prominent example of a potentially abusive trading strategy that cryptocurrency exchanges have addressed in their self-regulatory frameworks is wash trading. Wash trading has been alleged to artificially inflate trading volume on cryptocurrency exchanges, thereby fraudulently attracting more and more market participants. On behalf of cryptocurrency exchanges and market participants, Cornerstone Research has examined the exchanges’ volume integrity, including potential instances of wash trading. These investigations included assessing trading behavior in the context of varying market conditions as well as highlighting potentially prearranged trades.
Equity Index
On behalf of financial institutions and trading firms, Cornerstone Research has analyzed allegations of wash trading in equity index futures markets and treasury futures markets. The allegations at issue pertained to both voice trades and trades on electronic platforms. Our analysis focused on estimating the potential market impact of the events at issue.
Fixed Income
Cornerstone Research has investigated and analyzed patterns of potential round-trip trades among several traders of fixed income instruments. These complex structures involved three or more parties and multiple trades of varying sizes and at different prices. While they increased the parties’ market volume statistics, when viewed in aggregate, the structures appeared to comprise sets of transactions with no net change in positions. Using algorithmic coding, we were able to identify the occurrences of the structures at issue and analyze how they fit into the marketplace and impacted relevant positions and trading.
