Examkin

Question

Difficulty: MediumProhibited Market Manipulation and Fraudulent Practices

An individual day trader enters a series of very large buy orders for a security at prices below the current national best bid without intending to execute them. The trader's goal is to create a false appearance of overwhelming buying interest, prompting other market participants to raise their bid prices. Once the market price increases, the trader cancels the large buy orders and sells their existing long position at the inflated price. Which prohibited trading practice did the trader commit?

  1. SpoofingAnswer
  2. B
    Wash trading
  3. C
    Front-running
  4. D
    Backing away

Answer

The correct trading practice is spoofing, which involves placing non-bona fide orders to manipulate order book dynamics and price perception.
Spoofing is an illegal form of market manipulation where a market participant enters quotes or orders into an electronic trading system with the intent to cancel them before execution. The objective is to create misleading visual signals of market supply or demand, tricking other traders into buying or selling at artificially induced prices.

Step-by-Step Solution

1
Analyze the trader's intent and order activity
The trader submitted large orders with no intention of execution, solely to create false market depth and induce price movements.
Identifying whether orders are bona fide is essential to distinguishing legitimate trading strategies from manipulative activities.
2
Compare the behavior against regulatory definitions of market manipulation
Submitting orders intended for cancellation to falsely inflate demand and influence prices matches the definition of spoofing.
FINRA rules and federal securities laws explicitly prohibit quote spoofing and order book manipulation.

Key Concept

Spoofing vs. Other Prohibited Trading Practices
Estimated Time:1m 0s
Rate this question

Topics

Prohibited Market Manipulation and Fraudulent Practices