Examkin

Question

Difficulty: MediumProhibited Market Manipulation and Fraudulent Practices

A market maker publishes a firm bid price of 42.50forastock.Anothermemberfirmroutesamarketordertosellsharesbasedonthatquote,butthemarketmakerrefusestoexecutetheorderat42.50 for a stock. Another member firm routes a market order to sell shares based on that quote, but the market maker refuses to execute the order at 42.50, citing sudden market volatility. Which prohibited practice did the market maker commit?

  1. Backing away, by failing to honor a published firm quote upon receipt of an order.Answer
  2. B
    Wash trading, by placing non-bona fide orders that result in no change of beneficial ownership.
  3. C
    Improper principal trading, by failing to act strictly as a broker charging a commission.
  4. D
    Criminal statutory violation, enforced solely by FINRA using its sovereign police powers.

Answer

Backing away, by failing to honor a published firm quote upon receipt of an order.
Under FINRA rules, market makers are required to honor their displayed quotes. A failure to execute a trade at the stated bid or ask price upon receiving an order at that price is a violation known as backing away.

Step-by-Step Solution

1
Analyze the actions of the market maker in the scenario.
The market maker published a firm bid price but refused to execute an incoming order at that price.
FINRA rules require market makers to honor their quoted prices for the size specified.
2
Identify the regulatory definition that applies to failing to honor a firm quote.
Refusing to execute an order at a published quote is defined as backing away.
Market makers are obligated to stand behind their displayed firm quotes.

Key Concept

Backing Away Violation in Securities Trading
Rate this question

Topics

Prohibited Market Manipulation and Fraudulent Practices