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Difficulty: MediumProhibited Market Manipulation and Fraudulent Practices

A registered representative receives an institutional customer's order to purchase 150000150{}000 shares of a thinly traded common stock. Before placing the institutional order into the market for execution, the representative executes a buy order for 500500 shares in their personal brokerage account to capitalize on the price increase expected from the block trade. Which prohibited market practice has the registered representative committed?

  1. Front-running, by trading ahead of a pending customer block order that is reasonably expected to affect the market price of the security.Answer
  2. B
    Wash trading, by entering orders that create a false appearance of active trading without causing any net change in beneficial ownership.
  3. C
    A statutory infraction subject exclusively to SEC criminal prosecution, because self-regulatory organizations lack regulatory jurisdiction over employee personal trading accounts.
  4. D
    An undisclosed principal markup violation, because buying securities in a personal account requires acting as a market maker charging a dealer markup.

Answer

Front-running, by trading ahead of a pending customer block order that is reasonably expected to affect the market price of the security.
The correct answer accurately identifies the practice as front-running. Front-running is prohibited under FINRA rules and occurs when a broker or registered representative executes a personal or proprietary trade for a security while in possession of material, non-public information concerning an imminent customer block order in that security.

Step-by-Step Solution

1
Analyze the representative's conduct in relation to the customer order.
The representative used non-public knowledge of an incoming 150000150{}000-share institutional buy order to purchase shares for their personal account ahead of the customer's trade execution.
Institutional block trades typically exert upward pressure on market price.
2
Match the observed conduct against prohibited market practices.
Entering an order for personal or firm accounts while possessing material, non-public information about an impending customer block order is defined as front-running under industry rules (e.g., FINRA Rule 5270).
This practice unfairly disadvantages the customer and violates fiduciary duties.

Key Concept

Front-Running (Trading Ahead of Customer Block Orders)
Estimated Time:1m 0s
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Topics

Prohibited Market Manipulation and Fraudulent Practices