Wash sales got a very bad name during the Depression. Justifiably so, as they were one of the primary reasons for the tanking of the market.
A wash sale involves the same party at each end of the trade, buyer and seller. In the 1920s two-thirds of the volume of some stocks consisted of wash sales. The basic purpose of a wash sale is to pump a stock’s price so insiders can bail out at the top and transfer the losses of a worthless or inflated security to uninformed investors. This is done by the same party conducting or authorizing simultaneous buying and selling in the stock, typically making sure trades occur at ever rising prices until the operators have unloaded their stock. Without that support, the price crashes.
Wash sales were declared illegal in the 1930s. But now it looks as though they are making a comeback - vide "dark pools" - as our financial regulators have modified the rules, even to the point of calling these trades "self trades".
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