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Difficulty: HardProhibited Market Manipulation and Fraudulent Practices

An individual trader enters a sequence of non-bona fide limit orders for a thinly traded equity security to create a false appearance of market depth, intending to cancel them prior to execution once the stock price moves favorably. Simultaneously, the trader executes offsetting buy and sell orders for the same security across accounts with identical beneficial ownership to create artificial volume. Which of the following statements regarding these activities are correct?

  1. Entering non-bona fide orders intended to manipulate market prices and create a false impression of trading interest constitutes illegal spoofing.Answer
  2. Executing trades with no change in beneficial ownership to generate misleading trading activity constitutes prohibited wash trading.Answer
  3. C
    Executing matched buy and sell orders across accounts under common ownership is permissible as long as the trades are executed on a registered exchange.
  4. D
    Because FINRA is a self-regulatory organization rather than a federal agency, it lacks the legal jurisdiction to discipline member firms or associated persons for market manipulation.

Answer

Entering non-bona fide orders to manipulate prices constitutes illegal spoofing, and executing transactions with no change in beneficial ownership constitutes prohibited wash trading.
The scenario describes two distinct prohibited market practices: entering non-bona fide orders to deceive other market participants (spoofing) and executing offsetting transactions without changing beneficial ownership to create fake volume (wash trading). Both activities violate federal securities laws and FINRA rules.

Step-by-Step Solution

1
Analyze the first manipulative practice involving non-bona fide orders.
Entering orders with no intention of execution to trick market participants and move prices is defined as spoofing, which violates SEC and FINRA anti-manipulation rules.
Market participants must enter bona fide orders representing real trading interest.
2
Analyze the second manipulative practice involving simultaneous offsetting trades under common beneficial ownership.
Transactions resulting in no beneficial ownership change that create fake market volume are defined as wash trades.
Wash trades create a misleading impression of market activity and demand.
3
Evaluate regulatory jurisdiction over market manipulation.
FINRA has explicit statutory authority to sanction member firms and registered representatives for market manipulation under FINRA Rule 2010 and Rule 2020.
SRO authority allows FINRA to enforce compliance with ethical standards and federal securities laws among its members.

Key Concept

Market Manipulation Tactics and SRO Enforcement Scope
Estimated Time:2m 0s
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Topics

Prohibited Market Manipulation and Fraudulent Practices