Wash Trade (Wash Sale) question:

Discussion in 'Strategy Development' started by absaprophet, Jul 17, 2007.

  1. Question:

    If you continuously buy to add liquidity and then sell by taking liquidity on the same stock all day, is that considered wash sale or wash trade activity?

  2. JackR


    Yes. The rule applies for a 30 day window if you have a loss.

    If you are in and out the same day

    and end each day flat

    and have made a profit on the symbol you traded

    and the last sale was a profit

    you have no wash sale carry-forward. The 30 day window does not apply.

    If you ended the day with a loss then or the last sale was a loss you have a wash sale carry-forward and the 30 day window applies. It ends when you end a day with a profitable trade for the entire series.

    Technically you could keep track trade-by-trade and end a day in a position and not have the rule apply to that end-of-day position if the series leading up to that position had ended profitably. But that would be very difficult to track. However, there are record-keeping programs available to do that.

  3. No, as long as you are not trading with yourself and/or trading strictly to try and 'paint the tape'. If you are actively engaged in attempting to profit by trading back and forth on a stock, such as a market maker would do, then you are not wash trading.
    Many execution platforms will stricly enforce any attempt to trade against yourself by cancelling orders that have you on the otherside of the trade (ie hitting your own bid or lifting your own ask).
  4. JackR


    There seems to be a bit of confusion. Assuming your do not qualify for mark-to-market rules here is some info from your friends at the IRS:

    Wash Sales

    You cannot deduct losses from sales or trades of stock or securities in a wash sale.

    A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:


    Buy substantially identical stock or securities,

    Acquire substantially identical stock or securities in a fully taxable trade, or

    Acquire a contract or option to buy substantially identical stock or securities.

    If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.

    If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities. The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities begins on the same day as the holding period of the stock or securities sold.

  5. So basically I'm safe if I don't lift my own trade? How about if I add liquidity on one ECN and on the sell, take liquidity on another ECN that I am not posting quotes to?
  6. JackR


    Wash sales are as I defined them (the IRS info). You are adding in "self-dealing". I haven't a real clue. I thought it was illegal but perhaps AutoMate's answer is correct.

  7. JackR


    Did a quick Google search. This is from a NASD Study Outline:

    Prohibited transactions

    Self-dealing transactions —
    prohibitions and exemptions

    Class exemptions for certain
    broker/dealers and registered

    It implies what you want to do, as an individual, is prohibited. I'd investigate further. Perhaps the SEC web site.