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Difficulty: EasyProhibited Market Manipulation and Fraudulent Practices

Match each prohibited market practice on the left with its correct regulatory definition on the right.

  • FreeridingPurchasing securities and subsequently selling them in a cash account without paying for the purchase in full prior to the sale.
  • ChurningExcessive trading conducted in a customer's account by a broker primarily to generate additional commissions.
  • InterpositioningUnnecessarily routing a customer order through a third-party broker-dealer, adding unnecessary commission costs.
  • Painting the TapeCollusive transactions executed between market participants to generate a false appearance of active trading volume.

Answer

Freeriding matches with buying and selling securities in a cash account without paying for the initial purchase. Churning matches with excessive account trading by a broker to generate commissions. Interpositioning matches with routing orders through an unnecessary third-party broker-dealer. Painting the Tape matches with executing collusive trades to create artificial volume.
Each prohibited practice directly corresponds to its established regulatory definition: Freeriding involves trading on unpaid cash account funds; Churning represents excessive trading to boost broker revenue; Interpositioning adds an unnecessary execution layer that harms customer pricing; and Painting the Tape creates fake trading activity on public reports.

Step-by-Step Solution

1
Identify the payment and settlement violation in a cash account.
Match Freeriding with purchasing and selling securities without paying in full prior to the sale.
Federal Reserve Regulation T requires full payment for purchases in cash accounts before proceeds can be used for sales.
2
Identify the violation driven by broker commission generation.
Match Churning with excessive trading in a customer account for broker commissions.
Registered representatives must ensure trading activity aligns with customer objectives rather than broker remuneration.
3
Identify the order execution abuse involving unnecessary middleman fees.
Match Interpositioning with routing an order through an unnecessary third-party broker-dealer.
FINRA Rule 5310 requires best execution for customers, prohibiting superfluous intermediary fees.
4
Identify the market manipulation scheme aimed at inflating reported trading activity.
Match Painting the Tape with collusive transactions generating false trade volume.
Creating misleading reports of active trading violates anti-manipulation provisions of securities law.

Key Concept

Regulatory Definitions of Prohibited Securities Market Practices
Estimated Time:1m 0s
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Topics

Prohibited Market Manipulation and Fraudulent Practices