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Difficulty: MediumProhibited Market Manipulation and Fraudulent Practices

An institutional investor simultaneously executes matching buy and sell orders for a thinly traded equity security across two brokerage accounts under common ownership. The transactions create a misleading appearance of substantial trading activity and liquidity, though no real change in beneficial ownership occurs. Which of the following prohibited market practices has occurred?

  1. Wash tradingAnswer
  2. B
    Spoofing
  3. C
    Front-running
  4. D
    Interpositioning

Answer

The prohibited market practice described is wash trading, which occurs when matching buy and sell orders are executed without a change in beneficial ownership to artificially inflate trading activity.
Executing offsetting buy and sell orders for accounts controlled by the same beneficial owner to falsely portray market volume is the precise definition of wash trading under securities regulations.

Step-by-Step Solution

1
Analyze the trading behavior described in the scenario
The investor is placing opposing buy and sell orders of equal size for accounts under the same control, resulting in executed trades with zero net change in beneficial ownership.
Identifying the core mechanics of the trade helps distinguish between different types of market manipulation.
2
Evaluate the regulatory definition of wash trading
FINRA and SEC rules prohibit wash trading because executing transactions without changing beneficial ownership creates a deceptive impression of liquidity and market interest.
Market integrity rules prohibit deceptive volume creation intended to mislead other investors.

Key Concept

Wash Trading and Beneficial Ownership
Estimated Time:1m 0s
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Topics

Prohibited Market Manipulation and Fraudulent Practices