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Difficulty: EasyProhibited Market Manipulation and Fraudulent Practices

Which of the following trading activities represent prohibited market manipulation or fraudulent practices under Federal Securities Laws and FINRA rules? (Select ALL that apply.)

  1. Entering non-bona fide buy or sell orders with the intention of canceling them prior to execution to create a deceptive appearance of market liquidityAnswer
  2. Purchasing securities in a customer cash account and selling those same securities prior to paying for the initial purchase in fullAnswer
  3. C
    Executing simultaneous buy and sell transactions in the same security with no change in beneficial ownership, provided trade commissions are paid
  4. D
    Filing customer complaints with FINRA with the goal of having FINRA initiate criminal fraud prosecutions and prison sentences against a broker

Answer

The prohibited activities are spoofing (entering non-bona fide orders intended for cancellation) and freeriding (selling securities in a cash account without paying for the purchase first).
Entering fake orders intended for cancellation (spoofing) artificially distorts supply and demand, making it prohibited market manipulation. Additionally, selling stock in a cash account before paying for the purchase (freeriding) directly violates Regulation T payment rules.

Step-by-Step Solution

1
Analyze order entry intentions for non-bona fide quotes
Entering orders intended to be canceled before execution (spoofing) creates false market depth and is illegal price manipulation.
Market integrity rules prohibit deceptive order placements designed to mislead other market participants.
2
Evaluate cash account payment rules under Regulation T
Buying stock and selling it to pay for the purchase without depositing cash first (freeriding) violates Federal Reserve margin regulations.
Customers must pay for purchases in full before selling them in a cash account.
3
Differentiate illegal trading practices from regulatory jurisdiction
Wash trades (no change in beneficial ownership) are prohibited manipulation, while FINRA holds civil enforcement power rather than criminal prosecution authority.
Wash trading artificially inflates volume, and criminal prosecution requires government agencies like the Department of Justice.

Key Concept

Prohibited Trading Practices and Regulatory Violations
Estimated Time:1m 0s
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Prohibited Market Manipulation and Fraudulent Practices