Match each prohibited market practice with the description that accurately characterizes the fraudulent or manipulative trading behavior.
- CappingEntering sell orders for a security to prevent its market price from rising above a specific target price, often practiced by option writers seeking to prevent short call options from expiring in-the-money.
- PeggingEntering buy orders for a security to prevent its market price from dropping below a specific target price, often practiced by option writers seeking to keep short put options from expiring in-the-money.
- FreeridingPurchasing a security in a cash account and subsequently selling the same security prior to full payment, attempting to use the sale proceeds to settle the original purchase.
- Painting the TapeExecuting transactions among colluding market participants to generate fake trading volume and artificially inflate the reported price of a security to deceive other investors.
Answer
Capping matches with entering sell orders to keep a price from rising above a specific level. Pegging matches with entering buy orders to keep a price from falling below a specific level. Freeriding matches with purchasing securities in a cash account and selling them before paying for the purchase. Painting the Tape matches with executing manipulative transactions among colluding parties to generate deceptive trading volume.
Each practice is paired with its precise regulatory definition under FINRA rules and SEC anti-fraud provisions: Capping limits upside movement via sell orders; Pegging establishes a price floor via buy orders; Freeriding involves selling unpaid securities in a cash account; Painting the Tape involves collusive trades to fabricate trading activity.
Step-by-Step Solution
Key Concept
Prohibited Market Manipulation and Fraudulent Practices