Compliance
Wash Trading
Definition
Wash trading is buying and selling the same contract with yourself, or with accounts you control or coordinate with, so that trades are recorded without any genuine change in who bears the risk. It is used to inflate a market's apparent volume or liquidity, to create a misleading price, or to farm rewards, rankings or token incentives that depend on trading activity.
Under the US Commodity Exchange Act, section 4c(a)(2)(A) makes wash sales unlawful, and the CFTC's February 2026 prediction markets advisory listed wash sales among the prohibited practices on event contract exchanges. On crypto-based prediction markets, where one person can run many wallets, a November 2025 working paper by Columbia University researchers estimated that about a quarter of Polymarket's historical trading volume showed signs of wash trading, peaking at nearly 60% of weekly volume in December 2024.
Key takeaways
- Wash trading means trading with yourself or coordinated accounts so that volume is recorded without any real transfer of risk.
- It inflates volume and liquidity figures, can distort prices, and is often driven by rewards linked to trading activity.
- The Commodity Exchange Act prohibits wash sales, and the CFTC's 2026 advisory applies that to prediction market exchanges.
- Pseudonymous, multi-wallet crypto venues are especially exposed, which makes reported volume an unreliable metric without scrutiny.
Worked example
An illustrative pattern, not drawn from any specific case.
A trader controls two wallets, A and B, on a prediction market that rewards trading volume.
- Wallet A posts an offer to sell 10,000 YES contracts at 0.50.
- Wallet B buys them immediately. Recorded volume: 5,000 dollars.
- Minutes later B sells the same 10,000 contracts back to A at 0.50. Another 5,000 dollars of volume.
The trader ends where they started, minus any fees, but the market shows 10,000 dollars of activity and the trader qualifies for volume-based rewards. Repeated across thousands of wallets, this is how a meaningful share of a venue's reported volume can be artificial. Surveillance looks for exactly this signature: offsetting trades between linked accounts at the same price with no net position change.
Why it matters
Volume is the headline metric prediction markets and exchanges use to show traction to users, partners and investors, so wash trading distorts commercial decisions far beyond the trades themselves. Media companies, sportsbooks and data partners negotiating with a prediction market should treat reported volume as a claim to be verified, asking for open interest, unique active traders and the exchange's surveillance results.
The Columbia researchers linked wash trading on Polymarket largely to incentives such as potential token airdrops and leaderboards, rather than direct trading profit, which is a warning for any venue that rewards activity rather than genuine liquidity. On CFTC-regulated exchanges, wash sales are illegal and venues must detect and discipline them under their core principles; on offshore, pseudonymous venues, detection depends on on-chain analysis of linked wallets.
The controls overlap with gambling compliance. Linking accounts that share devices, payment methods or funding sources is the same discipline as multi-account detection and collusion monitoring in poker and betting. The prediction markets course explains how exchange surveillance works.
Wash Trading vs Collusion
| Wash Trading | Collusion |
|---|---|
| Linked or self-controlled accounts trade with each other to fake volume or prices, with no genuine change in risk. It targets market data and incentives. | Coordinated accounts work together to defraud an operator or other players, for example sharing information at a poker table. It targets other participants' money. |
Both are detected by linking accounts through devices, payments and behaviour, so operators and exchanges can use the same detection tooling for each.
The bottom line
Wash trading is trading with yourself or coordinated accounts to fake volume or prices without real risk transfer. It is illegal on CFTC-regulated markets and widespread on some crypto venues, so reported volume should never be taken at face value.
Sources
- 7 U.S. Code 6c: Prohibited transactions - Legal Information Institute, Cornell Law School
- CFTC Enforcement Division Issues Prediction Markets Advisory (Release 9185-26) - Commodity Futures Trading Commission
- Polymarket's Trading Volume May Be 25% Fake, Columbia Study Finds - CoinDesk
Frequently asked questions
What is wash trading?
Wash trading is when the same person, or a group acting together, sits on both sides of a trade, buying and selling the same contract so that trades are recorded without any real change in ownership or risk. The aim is usually to make a market look more active or liquid than it is, to influence its price, or to qualify for rewards based on trading volume.
Is wash trading illegal?
On US futures and event contract exchanges regulated by the CFTC, yes. Section 4c(a)(2)(A) of the Commodity Exchange Act makes wash sales unlawful, and the CFTC's February 2026 prediction markets advisory named wash sales among prohibited practices. Securities markets have similar prohibitions. On offshore or unregulated crypto venues, legal consequences depend on jurisdiction, but the activity still misleads other users.
What is wash trading on Polymarket?
It refers to findings that a significant share of Polymarket's trading volume came from accounts trading with themselves or with linked wallets. A Columbia University working paper published in November 2025 estimated that about 25% of historical volume showed signs of wash trading, peaking at nearly 60% of weekly volume in December 2024. The researchers linked it mainly to incentives such as potential token rewards.
How do exchanges detect wash trading?
Exchanges look for offsetting trades between the same or linked accounts at similar prices with no net change in position. They link accounts using identity data, devices, IP addresses, funding sources and trading behaviour, and many use self-match prevention to block an account from trading with itself. On blockchain venues, analysts trace wallet funding and trading loops on-chain to identify clusters.