Pam Martens writes about the illegal practice of wash sales, which is essentially one entity being on both sides of a trade and manipulating (e.g., pumping up) prices with trades to itself.  This practice allows entities, such as Citigroup, to artificially inflate stock prices (or prices of derivatives or other trading vehicles) by creating fake demand using algorithms run on different in-house trading desks.

In effect, the prior rules prohibiting wash sales have been obliterated and are no longer enforced as originally intended to prevent market rigging. The intentional, re-designed definitions create a "loophole" larger than the rules themselves and permit trading desks belonging to the same entity to trade with each other. 

Bart Chilton, Former CFTC Commissioner, Speaks Out on “Voluminous” Amount of Wash Sales, March 18, 2013

Wall Street's Regulators Sell Out on Illegal Wash Sales

By Pam Martens

Wash sales – one of the most virulent forms of stock manipulation that bankrupted banks and corporate conglomerates in the Great Depression and intensified the stock market crash of 1929 to 1932 – has reached scandalous proportions in today’s markets. The response from regulators? Gut the rules that make it a crime.

On March 18 of last year, Bart Chilton, then a Commissioner at the Commodity Futures Trading Commission (CFTC), stunned CNBC viewers with the announcement that wash sales were rampant in the futures markets. Speaking to Squawk Box host, Joe Kernen, Chilton stated:

“Well these wash sales, Joe, people know they’re illegal; they’re not allowed. A wash sale is when somebody trades with themselves. But what we’ve discovered is that they are going on at this large, voluminous level. I mean, to me, a shocking level. And they’re impacting what people see as volume. So this is an area that we’re going to review to ensure that markets are operating efficiently and effectively. Who knows what sort of impact they’re having. And it raises a host of policy questions that we have out there, because this stuff just shouldn’t be allowed.”

Volume is hardly the only problem with wash sales: the age old tactic of a wash sale is to pump a stock’s price so insiders can bail out at the top and transfer the losses of a worthless or inflated security to uninformed investors. This is done by the same party conducting or authorizing simultaneous buying and selling in the stock, typically making sure trades occur at ever rising prices until the operators have unloaded their stock. Without that support, the price crashes.

Laws making it illegal for one party to be on both the buy and sell sides of a stock transaction were implemented during the legislative reforms of Wall Street in the 1930s. They have had legal certainty for the past 80 years until this May 1 when Wall Street’s coddling, captured regulators, the Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA), gutted the wash sale rules beyond recognition – even changing the name of the illegal practice from “wash sale” to the benign “self trade.”

[...]

Eighty years of sound, prudent securities law has now been wiped out as Congress seems to muddle about in a daze. The pool operators of the 1930s have been reincarnated today in the form of Wall Street’s dark pools. The protections of the depression-era Glass-Steagall Act which barred the Wall Street speculators from getting ownership of insured deposit banks to gamble in stocks and derivatives – wiped away with the passage of the Gramm-Leach-Bliley Act in 1999.  Now rampant wash sales have been given a less onerous name and a green light by the top securities cop – a cop that today is staffed with Wall Street’s favorite former lawyers.

(my emphasis)

Read Pam's full article here