"Wash trades" -- trades that give the appearance of a sale and purchase of a futures contract, but do not expose the parties to market risk, or that leave the parties in the same position after the trade as before it -- have been illegal for many years. Wash trades send false signals to the market, making it appear that there is more interest in a contract than there actually is.
Many high frequency trading programs commit wholesale wash trades, sometimes even accepting their own offers. Whatever may be the benefits of HFT -- a topic of intense debate -- they come at the price of these wash trades.
Should the CFTC seek to enjoin or otherwise penalize wash trades committed by HFT programs? Perhaps the enforcement process would enable the agency to evaluate HFT programs more rigorously and put the advocates of the programs to their proof. Should programmers be required to cleanse HFT programs of features that induce wash trades? The objections to wash trades seem to be the same whether they are executed in the old-fashioned, paper-based systems, or at lightning speed by computers. And, in any case, the law articulated by Congress and the courts doesn't seem to support any distinction premised on the environment in which the trades are conducted or on alleged countervailing benefits to the market.
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