What is ‘Accommodation Trading’
Accommodation trading is a type of trading in which a trader accommodates another by entering into a non-competitive purchase or sale order. An Accommodation trade is often executed when two traders are participating in illegal trading. Certain types of accommodation trades can also be known as wash sales.
BREAKING DOWN ‘Accommodation Trading’
An accommodation trade could occur when two traders agree to exchange a Stock for a price well below the market value, allowing the seller to realize a large investment capital loss on the shares for tax purposes, which can then later be reversed. Accommodation trading is illegal in most countries. Accommodation trading is often seen in the same situations in which money laundering is detected and can be a tipoff to the financing of terrorist or other criminal organizations.
There are types of accommodation trades that are permitted under securities law. Investors and traders who have an open long or short option position that has essentially become worthless as a result of time decay and price movement may be able to close out the position through a closing transaction known as a cabinet trade. A cabinet trade is an accommodation trade that allows the option holders to clear the option position off their books for 1 cent per share or $1 per contract.
For example, a market participant might have a long position in a call series with a strike price of $100 and the underlying stock might now be trading at $30. In such an instance, there might not otherwise be a market for that person to close-out its position even at the $1 cabinet price; for instance, the series might be quoted no bid. Open long and short positions will be offset and any remaining orders will remain on the books for an offsetting purchase or sale.
Example of Accommodation Trading
For example, suppose that Bill purchased stock in Company XYZ at $55 per share. With tax season coming soon, Bill decides to sell the stock to Joe for $45, even though the shares are currently trading at $60. Bill realizes a capital loss of $10 per share, which he can use to lower the taxes paid on any capital gains on other investments. After the taxes are filed, Joe sells the stock back to Bill at $45. This trade allows Bill to cheat the tax system because he never actually lost any value on the stock.
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