A wash trade is a prohibited practice in which a trader does what?

• A. Buys only and sells nothing
• B. Buys and sells the same security at the same time to create a false activity
• C. Sells short without borrowing shares
• D. Trades after hours only

Answer: (B)

A wash trade involves buying and selling the same security in a way that creates the appearance of activity without any real change in ownership or risk. The key idea is deception: the trade is meant to mislead others into believing there’s genuine demand or liquidity when there isn’t. That’s why this practice is prohibited—it inflates volume and can move prices without a legitimate investment purpose. The scenario described fits this idea because the trader simultaneously buys and sells the same security to create a false, artificial level of activity. Other options don’t describe this manipulation: buying without selling doesn’t create artificial activity; selling short without borrowing shares relates to naked short selling, a separate violation; and trading after hours concerns timing, not deceptive volume.