One broker orders another to sell a certain quantity of stock at a fixed price, and when it is sold on the stock exchange, the first broker buys it back again. The stock does not actually change hands, but the " ticker " reports the sale and gives a false impression as to the activity of the stock, and no commission is received by the broker making the purchase. An example of a " wash " transaction would be between two stock exchange houses; the first, Smart & Co., orders Clement Bros. to sell a thousand shares of Union Pacific stock at a certain price, for which, of course, they will receive a regular commission. Smart & Co., however, buy this stock in at the time the sale is made, but as this stock had belonged to them, they receive no commission on the purchase. This sort of business is against the rules of the stock exchanges, and when discovered, the perpetrators are penalized. Had John Astor, not owning a seat on the exchange, given Smart & Co. an order to sell this stock through Clement Bros., and then again had ordered Smart & Co. to make the purchase, so that an actual commission had been paid a broker for both the buying and the selling, the transaction would have been legal, so far as the rules of the stock exchange are concerned. But for John Astor it would have been a "wash sale," as he was endeavouring to establish an apparent activity in the stock which really did not exist. Such a transaction would come under the head of " manipulation," rather than a " wash sale," because, from a stock exchange point, it would not be technically the latter.
As early as 1820 a rule was passed prohibiting such transactions upon the New York Stock Exchange.
Dos Passos' Law of Stock-brokers defines "wash sales," on the basis of judicial decisions, as "not real sales, but made by persons interested in each other, for the purpose of giving a fictitious value to the stock."