shit...what a moron i'm..you right, i was talking about wash sale for all that time..too much vodka wash trade is certainly illegal http://financial-dictionary.thefreedictionary.com/Wash+Trade
I think intent would play into whether this specific example is illegal. As previously mentioned, I don't think two 1000 share trades of PFE is going to have any effect on PFE's price or any other traders actions (unlike a transaction on some thinly traded pink sheet stock). I'd like to see the actually wording of the law...absent an attempt to manipulate/commit fraud I don't see why it would be illegal...I can envision a legitimate reason why someone would want to do this.
What Does Short Sell Against the Box Mean? The act of short selling securities that you already own. This results in a neutral position where your gains in a stock are equal to the losses. For example, if you own 100 shares of ABC and you tell your broker to sell short 100 shares of ABC, you have shorted against the box. An alternative to short selling against the box is to buy a put on your stock. This may or may not be less expensive than doing the short sale. Also known as "shorting against the box". http://www.investopedia.com/terms/s/sellagainstthebox.asp
A major brokerage firm hassled me for transferring positions from one account to another like this (which is all I was doing). They detected it with their market surveillance software. They just asked for an explanation and a promise not to do it again. So do not do it - it is not worth the hassle from the broker, even though there is absolutely nothing illegal or improper about it. Instead, do something similar a different way. The wash sale rule mentioned by some here is not really a concern as it is just a tax rule - it does not make such trades illegal or improper, just gives them tax consequences. Their concern is more "painting the tape", i.e. market manipulation, even though such a concern is ridiculous for small trades.
This subject has always been of huge interest to me. It always kills me that no one wants to discuss the why part of this. Either direction you do this, it all comes down to taxes period, usually involving an IRA account on one of the accounts. A friend of mine wanted to do this with his IRA account. The trick being that he picks say a crude oil future. He goes short in his IRA, goes long in his cash trading account. Why would he want to do this ? Several reasons, if crude goes up he makes money in his cash account, effectively he has almost transfered money from the one account to the other. If the trade goes wrong, worst case scenario he is transfering post tax money into a pretax account. If he is correct, he still pays the same taxes, he just pays taxes on the gain today at todays rates that he knows. Better yet, who says you have to exit the trades the same, once a person has the winning side setup and has their stops in, who says you have to close out both sides at the same time. In effect he is hedging, he can leg in, and control the risk cause he is effectively virtually flat (long & short) until he closes out one side of the trade. While researching this subject, I found alot of people asking the same question, only they seemed to be purposely trying to do the opposite, transfer money into their 401k. It took me a minute to figure out why a person would want to do that. Again, you could do the hedging benifit, but in this case It appears to me that they are trying to defer income, thus lower their tax basis for this tax year, pay the piper later on the 401k/IRA. That seems much more questionable to me and more likely to get a person in trouble in my opinion. Furthermore, there is one more rule you need to be careful of and the reason why you got warned on your trade. There is a rule against SELF TRADING. If you research it you will find that it applies to cases where you buy and sell to yourself. If you were bid in one account, and the sell in the other you are effectively manipulating the market and effecting a no risk transaction that can affect the tape, in their opinion. It looks to me like you could get around that rule by legging in one trade at a time, thus you have some small market risk which negates that rule as you were trading with third parties at that point and subject to market risk ( a key part of the self trade rule ). A lot of people will argue against this method, as they trade small accounts and might sweat the risk of a penny swing here or there on a stock or whatever (they are thinking scalping pennies etc). Granted a person would have to be careful what and where they trade, but what they forget is many other people play with bigger lots and accounts and are willing to risk that penny or much more in the case of futures. I would be interested to hear other peoples opinions. In my opinion a person needs to be aware of the wash rule and self trading rule, and understand the implications (permenately disallowing a deduction is a big one). In the case of the wash rule it gets even trickier as wash trades are NOT illegal. You just have to declare them. The trick comes in that , how do you do that on an IRA account ?
Trades with undefined risk are not permitted in IRA's. You can buy puts or bear spreads but you can't short equities directly. "...He goes short in his IRA, goes long in his cash trading account. " The OP is talking about a wash trade from the SEC's perspective and a wash sale from the IRS's perspective. The IRS won't care as long as you correctly report it, but the SEC may not be too happy if you should get caught.
"Wash sale" is perfectly legal, it's just treated in a specific manner for tax reporting purposes. "Wash trade" is illegal. The difference between the two is that in the latter case, you are trading against yourself. It's easy to see why "wash trading" is illegal. Let's say there is a very thinly traded security, and there is a period of no bids and no offers. Then you can effectively set any "market" price for that security by placing a bid and the ask from two different accounts, which will result in a trade at your price. This artificially set price amounts to market manipulation. The critical factor is whether the ownership of securities changes as a result of a transaction. If the ownership does not change, this is probably illegal. Here is a case study: http://www.sec.gov/litigation/complaints/comp19164.pdf Now, in the original poster's case, it looks like the security in question is a liquid one, so it would be simply impossible to trade with yourself. That is to say, whether you use one, two, or a dozen of accounts simultaneously does not matter, because if there is a market, then whenever you sell or buy, there is a counter party on the other side of a transaction.
You are dead on. And if your trading something quite liquid I see very little risk of making a "wash trade", as there is very little risk of trading with yourself. And while they have the dumb rule about not shorting an equity, their rules do allow people to do many other creative things such as sell futures, etc. With a custodial self directed ira a person can even short equities due to the way custodial accounts work.