A market participant enters matching buy and sell orders for the same security at substantially the same time and price using two accounts under common beneficial ownership. The trades result in no actual change in beneficial ownership, but create a false impression of market activity and volume to attract other buyers. Which of the following prohibited market practices has occurred?
- Wash trading, because offsetting orders were executed without a change in beneficial ownership to simulate market activity.Answer
- BSpoofing, because non-bonafide orders were entered and immediately canceled prior to execution.
- CBroker-dealer role confusion, because the firm failed to disclose its capacity as a principal dealer.
- DAn SRO criminal infraction, because self-regulatory organizations possess direct criminal prosecution authority over fraudulent practices.
Answer
Wash trading, because offsetting orders were executed without a change in beneficial ownership to simulate market activity.
The scenario describes wash trading, a form of market manipulation where an investor enters matching buy and sell orders under common ownership so that no real change in beneficial ownership occurs. The purpose is to paint a misleading picture of high trading volume to deceive other market participants.
Step-by-Step Solution
Key Concept
Wash Trading and Market Manipulation Prohibitions