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Difficulty: EasyProhibited Market Manipulation and Fraudulent Practices

A registered representative enters matching buy and sell orders for a security across accounts controlled by the exact same beneficial owner, creating the false impression of active trading volume while no real change in ownership takes place. Which of the following prohibited market practices has taken place?

  1. Wash tradingAnswer
  2. B
    Spoofing
  3. C
    Broker-dealer mark-up violation
  4. D
    SRO criminal prosecution

Answer

Wash trading is the prohibited practice of executing trades with no change in beneficial ownership to fake market activity.
Wash trading occurs when an investor or firm simultaneously buys and sells the same financial instrument to create artificial activity in the marketplace without exposing the trader to market risk or changing beneficial ownership.

Step-by-Step Solution

1
Analyze the customer trading behavior described in the scenario.
Matching buy and sell orders are executed without any shift in true beneficial ownership.
Identifying whether beneficial ownership changes helps distinguish genuine trades from manipulative volume inflation.
2
Match the observed behavior with regulatory definitions of prohibited market practices.
Transactions designed solely to generate false activity without altering beneficial ownership define wash trading.
Under FINRA and SEC rules, executing offsetting orders for self-dealing accounts is strictly illegal manipulation.

Key Concept

Wash Trading Prohibitions
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Topics

Prohibited Market Manipulation and Fraudulent Practices