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Difficulty: EasyProhibited Market Manipulation and Fraudulent Practices

Match each prohibited market practice with its correct regulatory definition.

  • ChurningExcessive trading in a customer's account by a broker primarily to generate additional commissions.
  • FreeridingPurchasing securities and then selling them before paying for the original purchase.
  • Marking the CloseExecuting trades near the end of the market session to artificially influence a security's final price.
  • CappingEntering sell orders designed to keep a security's price from rising above a specific target level.

Answer

Churning matches excessive trading to generate commissions; Freeriding matches selling purchased securities before paying for them; Marking the Close matches executing trades near market close to influence final price; Capping matches entering sell orders to prevent price from rising.
Each prohibited practice corresponds directly to its established regulatory definition under FINRA and SEC rules. Churning targets commission abuse by representatives; Freeriding violates payment requirements under Regulation T; Marking the Close artificially inflates or suppresses closing prints; and Capping places sell volume to prevent upward price movement.

Step-by-Step Solution

1
Identify the primary motive and method of Churning.
Excessive trading controlled by a broker to maximize commission revenue matches definition 4.
Registered representatives owe a fiduciary duty to suit trading activity to customer objectives rather than personal commission generation.
2
Identify the mechanics of Freeriding.
Buying securities and subsequently liquidating them before making full payment matches definition 1.
Federal Reserve Board Regulation T requires full settlement payment for purchases made in cash accounts.
3
Identify the timing and objective of Marking the Close.
Executing orders right before market close to affect the benchmark closing price matches definition 2.
Closing prices affect portfolio valuations, margin requirements, and option exercise settlements.
4
Identify the structure of Capping.
Placing sell orders to cap the market price from breaking above a ceiling matches definition 3.
Capping is frequently used by option writers seeking to prevent call options from expiring in-the-money.

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Prohibited Market Manipulation and Fraudulent Practices
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Prohibited Market Manipulation and Fraudulent Practices