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Difficulty: EasyProhibited Market Manipulation and Fraudulent Practices

An investor simultaneously buys and sells shares of a company using two accounts under common beneficial ownership, specifically to generate the false appearance of market liquidity and active volume. Which prohibited market manipulation practice does this action represent?

  1. Wash tradingAnswer
  2. B
    Spoofing
  3. C
    Principal trading
  4. D
    SRO criminal enforcement

Answer

Wash trading
The term 'wash trading' refers directly to entering offsetting buy and sell orders for a security where there is no genuine change in beneficial ownership, executed solely to give the illusion of active market volume.

Step-by-Step Solution

1
Analyze the investor's action described in the scenario.
The investor enters offsetting buy and sell orders across accounts with no actual change in beneficial ownership.
Identifying whether beneficial ownership changes helps classify the specific manipulative trading practice.
2
Match the observed activity with regulatory prohibited practices.
Trading with oneself to create artificial volume is defined as wash trading under FINRA and SEC rules.
Wash trades mislead the investing public regarding genuine market liquidity and trading demand.

Key Concept

Prohibited Market Manipulation - Wash Trading
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Prohibited Market Manipulation and Fraudulent Practices