By Vijay Pravin Maharajan
Wash trading, a form of market manipulation, occurs when an individual or a group of individuals repeatedly buy and sell the same financial asset to create the illusion of high trading volume and attract other investors. This can lead to distorted market prices and harm both individual investors and the wider financial system. To combat this fraudulent activity, regulators and financial institutions use a variety of analytical techniques collectively known as wash trading analysis. In this article, we will delve into the details of wash trading analysis, exploring what it is, why it matters, and how it works.
Why is wash trading illegal and unethical?
Wash trading is illegal since it creates an inaccurate impression of market activity that may mislead buyers and sellers. It is unethical as it goes against fair and direct marketing. It has adverse consequences for dealers and customers unaware of the deceptive activity. A digital asset may be misrepresented to investors and dealers as being more valuable or in higher demand than it is. On that note, NFT marketplaces have allegedly seen trading activity totaling $73.8 billion, but Dune Analytics data show that over 42% of that traffic is fake, with wash trading accounting for $31.2 billion.
Why is wash trading analysis Important?
It is essential to analyze wash trading because it can expose unethical trading practices and end-market deception. For instance, trading increased by 117% from $941 million in January to $2.04 billion in February.
Blur’s trading volume increased to over $1.13 billion in just February, contributing substantially to the market’s monthly gains. Therefore, if Blur’s activity is not considered as wash trading, the market figures for February entirely would be closer to the values of January.
When using accurate market statistics to make decisions, traders and investors can make the best of their investments and safeguard their money. Regulators responsible for ensuring equitable and transparent financial markets can also benefit from wash trading analysis. Regulators can take action to stop fake trading and safeguard consumers by spotting wash trading activity.
How does wash trading analysis work?
The primary objective is identifying trading patterns and trends deviating from normal market behavior. The concept employs data analysis and machine learning to detect trends that could be signs of fraudulent trading activity. Either traditional or real-time market data is utilized for such research.
Statistical analysis, data visualization, and machine learning are just a few examples of the techniques and devices employed for wash trading analysis. Trading volume is one of the most vital indicators of wash trading activity. A financial asset’s trading volume may indicate possible wash trading activity if it is abnormally high. Other signs could be out-of-the-ordinary price changes, consistent bid-ask spreads, or a lack of market depth. Another possible indicator of a wash trading scheme is to entice unwitting traders with low or discounted costs.
In conclusion, wash trading, an unethical strategy, may hurt traders and investors unaware of the fraud. It is best to avoid trading NFTs on websites that permit anonymous or unverified users and stick with reputable marketplaces that implement strict vetting procedures for vendors and listings.
Investors, traders, and authorities can ensure that financial markets are honest and open using wash trading analysis. There are many ways that traders and platforms influence the market, so before participating in any trading or investing, one should conduct their own research and analysis.
Finally, if users need clarification, getting assistance can help. Financial advisors and traders with experience in NFT marketplaces can offer insight on how to spot suspicious-looking NFTs or trading data.
The author is founder and CEO, bitsCrunch