News 02/07/25

AFM Market Watch: Wash trades’ impact in current landscape

Information drives decision-making, pricing, and behaviour in financial markets. In recent years, not only has the amount of available information increased, but so has the speed at which market participants process it. Trading algorithms react to signals in milliseconds. In the 13th edition of the AFM Market Watch, we dive into the signals emanating from the order book and transactions. Using the example of 'wash trades', we shed light on the fact that trading behaviour can take various forms, potentially sending different signals. We elaborate on the actions market participants are expected to take in response to wash trades.

In short

• Orders and transactions transmit signals that influence trading
• Wash trades may affect outcomes of trading algorithms
• Reporting obligations to the AFM

Orders and transactions transmit signals that influence trading

Every order and transaction sends several signals. For example, placing a buy order generally indicates that a party is willing to purchase a certain quantity of a financial instrument at a specific price. Likewise, a sell order signals that a party is prepared to sell a certain amount at a given price. A transaction communicates that ownership of a specific quantity of a financial instrument has been transferred from a seller to a buyer at an agreed price. However, in the case of a wash trade, there is no transfer of economic interest or market risk, as the trader’s position effectively remains unchanged.

Wash trades may affect outcomes of trading algorithms

Multiple factors influence algorithmic trading, including order book volume, price trends, market volatility, and the balance within the order book. A wash trade can affect each of these elements and, as a result, influence trading behaviour. This highlights the importance for market participants to analyse whether the signal that is given by these orders or transactions is not incorrect or misleading. In order to answer the question of whether a wash trade qualifies as market manipulation, market participants must always refer to the definition of market manipulation as set out the Market Abuse Regulation.

Reporting obligations to the AFM

Market participants should assess wash trade transactions on a case-by-case basis. It is not considered necessary to report every individual wash trade. However, if these wash trades lead to a reasonable suspicion of market manipulation, or an attempt thereof, these must be reported to the AFM via a Suspicious Transaction and Order Report (STOR).