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I have algo trading program (written by myself) and when it detects that price are going down it's going to sell shares (if I have one) wait a couple of sec/min and buy the shares on lower price.

Last time I saw on Wikipedia that my strategies in some way describes wash trade, however I'm not trade on huge volume, I'm just detecting price movements and use it as my strategy, but sometimes I'm going to detect price fall before it happen (volume, moment etc - technical analysis) and start selling, so from outside world it may look like I initiate fall in price.

Can authorities claim that it's wash trading and start legal process?

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    The point of wash trading is to create real demand from false demand. It doesn't sound like you are doing that, even unintentionally. Your algo apparently reacts to real trades.
    – user26460
    Jul 31, 2023 at 21:14
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    This kind of algorithm is very unlikely to work. First, you are likely risking large losses for small gains. You don't have to be wrong very often for that to work badly. Second, if you sell after a drop, you will maximize volatility drag. You generally want to buy after a drop to take advantage of the drop in price and to restore your exposure which has decreased if you're already holding. Aug 2, 2023 at 14:44
  • @davidSchwartz you are right, it works sometimes alone, but mostly used for tests. It's just a shortcut for the bigger arbitrage strategy - just provided part of the bigger ecosystem from one market to simplify problem. Aug 2, 2023 at 15:37
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    No reason to not have fun with algorithmic trading (with money you can afford to gamble and lose), but do be aware that if a strategy like this works, somebody on wall street with access to lower-latency trades is probably doing it faster than you can. Beating the market is hard.
    – Kaia
    Aug 3, 2023 at 16:38

2 Answers 2

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This doesn't sound like the kind of wash trading described in the Wikipedia article (market manipulation). There are many medium to high frequency trading strategies like it.

However, your trades will probably be considered wash sales for tax purposes (disallowed losses since held less than 30 days).

You might also be flagged as a pattern day trader, which isn't illegal but comes with additional constraints/rules.

Edit: You linked to an article, regarding illegal market manipulation that doesn't apply to you. It's a wash sale that applies as noted above. No 'legal process' as it's not illegal, it just becomes something that turns into a tax question. Wash sale questions are common here. /JTP

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    It's not some additional constraints/rules. OP needs to be very careful to avoid being labeled as a Pattern Day Trader by the SEC... OP probably isn't prepared for everything that comes with that, including minimum balances etc.
    – SnakeDoc
    Jul 31, 2023 at 18:18
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    If your broker flags you as a pattern day trader the only thing that happens is they stop letting you do trades that fit the pattern day trade mold. It's not like you just wake up and have to pay money you don't have. Aug 1, 2023 at 15:08
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    The min balance for a pattern day trader is $25k. If you're trading with your own algo on individual securities then you really should have that or else you should not be so risky with your money. Aug 1, 2023 at 15:11
  • Regarding the wash sale, if my memory serves me correct, you're just not able to realize a capital loss until you exit the position for I think 30 days. Someone correct me if I'm wrong, but if you buy at 10 shares @ $100/share, enter and exit 100x times over 3 months, finally sell for $10/share, you're then able to realize a capital loss of $900 as long as you don't repurchase for 30 days?
    – Travis
    Aug 2, 2023 at 16:23
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From the referenced article which I have no reason to disagree with:

Wash trading is a form of market manipulation in which an entity simultaneously sells and buys the same financial instruments, creating a false impression of market activity without incurring market risk or changing the entity's market position.

  • Are you buying and selling simultaneously?
  • Are you attempting to manipulate the market?
  • Are you incurring risk?

Based on your question I think your answers are 'no', 'no', and 'yes'. If you were engaged in illegal wash-trading, your answers would be 'yes', 'yes', and 'no'.

Seems to me that what you are doing is not only legal but pretty straightforwardly so.

Wash trading is where you sell shares to yourself (or an accomplice) in order to make it look like (typically) that there's some sort of upward market momentum around some asset. It's pretty well known (I think) that this kind of scam represents a large portion of the volume for cryptocurrencies (yes, even Bitcoin) if not most of the volume.

Unless you are fabulously wealthy, talking about shitcoins (sorry, that's the 'official' term), or are trading penny stocks, you aren't moving the market. I think you are OK.

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    I had never heard the term "shitcoin" before, and it's depressing that most of the results when I search for it are not definitions, but "tips" for getting rich from them. It's like if searching for "ponzi scheme" gave you some how-to guides for exploiting people with them :(
    – IMSoP
    Aug 1, 2023 at 16:50
  • @IMSoP Yeah, years ago I saw someone promoting a book titled something like "shitcoin trading for fun and profit". I thought it was a joke but sadly, no.
    – JimmyJames
    Aug 1, 2023 at 18:09
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    @IMSoP "The term shitcoin refers to a cryptocurrency with little to no value or a digital currency that has no immediate, discernible purpose. The word is a pejorative term often used to describe altcoins or cryptocurrencies that were developed after bitcoins became popular."
    – 0xFEE1DEAD
    Aug 3, 2023 at 13:38

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