During a routine audit of trading activity, a compliance officer identifies several actions taken by associated persons of a broker-dealer. Which of the following activities represent prohibited market manipulation or fraudulent practices under securities regulations? (Select ALL that apply.)
- Purchasing equity shares in a personal account immediately prior to executing a client's large institutional block order in the same securityAnswer
- Executing offsetting buy and sell orders in a security with no actual change in beneficial ownership to give the false impression of active tradingAnswer
- CActing as a broker to match a buyer and seller in a secondary market transaction and receiving a reasonable commission for the execution
- DCanceling a bona fide limit order prior to execution after prevailing market prices move away from the specified limit price
Answer
The prohibited practices are purchasing shares in a personal account immediately prior to executing a client's large block order (front-running) and executing offsetting trades with no change in beneficial ownership (wash trading).
Both purchasing shares ahead of a client's large block order (front-running) and entering offsetting trades with no change in beneficial ownership (wash trading) are illegal, manipulative practices designed to exploit non-public order flow or deceive the market regarding trading volume.
Step-by-Step Solution
Key Concept
Prohibited Market Manipulation and Fraudulent Practices