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Difficulty: MediumProhibited Market Manipulation and Fraudulent Practices

An investor simultaneously places offsetting buy and sell orders for the same security across two accounts under their common control. The orders execute against each other, resulting in no actual change in beneficial ownership, but generating the appearance of substantial market activity to induce others to trade. Which of the following prohibited practices has occurred?

  1. Wash trading, because transactions were executed with no change in beneficial ownership to artificially inflate trading volume.Answer
  2. B
    Spoofing, because non-bona fide orders were entered into the order book with the intent to cancel them before execution.
  3. C
    Front-running, because a broker-dealer executed principal trades in its own market-maker inventory ahead of customer limit orders.
  4. D
    A permissible volume-boosting strategy, provided the trader registers with FINRA's criminal prosecution division prior to execution.

Answer

Wash trading, because transactions were executed with no change in beneficial ownership to artificially inflate trading volume.
The correct answer highlights wash trading. Wash trading occurs when an investor enters matching buy and sell orders for a security across accounts with common beneficial ownership. The primary objective of this prohibited activity is to create a false or misleading appearance of active trading and volume in order to deceive other market participants.

Step-by-Step Solution

1
Analyze the trading behavior described in the scenario
The investor is executing simultaneous buy and sell transactions in the same security across accounts under common control.
Identifying the mechanics of the trade helps distinguish between different market manipulation tactics.
2
Evaluate the change in beneficial ownership
There is no change in beneficial ownership because the same entity controls both sides of the transaction.
Executing trades without altering beneficial ownership solely to give the illusion of activity defines wash trading under federal securities laws.
3
Match the behavior to the appropriate regulatory prohibited activity
The practice is identified as wash trading, which violates SEC rules and FINRA market conduct standards.
Differentiating wash trading from spoofing, front-running, or churning is essential for regulatory compliance assessment.

Key Concept

Wash Trading and Prohibited Market Manipulation
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Topics

Prohibited Market Manipulation and Fraudulent Practices