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Difficulty: MediumProhibited Market Manipulation and Fraudulent Practices

Match each prohibited securities market practice with the regulatory scenario or definition that accurately describes the violation.

  • InterpositioningInserting an unnecessary third party between a customer order and the best available market price, causing higher cost or lower execution quality.
  • Front RunningEntering trades for a firm or member account with nonpublic knowledge of an upcoming customer block order expected to move the market.
  • Marking the CloseExecuting trades shortly before the market closes to artificially influence the official settlement price of a security.
  • Free-ridingBuying securities in a cash account and selling them prior to paying for the purchase in full before settlement.

Answer

Interpositioning matches inserting an unnecessary third party to generate extra costs; Front Running matches trading ahead of an upcoming nonpublic customer block order; Marking the Close matches entering trades near the end of the session to manipulate closing prices; and Free-riding matches buying and selling securities in a cash account without paying for the purchase.
Each concept corresponds directly to its FINRA and SEC prohibited practice definition. Interpositioning adds an unneeded intermediary. Front running uses nonpublic block order information to trade ahead. Marking the close manipulates closing prices. Free-riding violates Regulation T settlement payment requirements in cash accounts.

Step-by-Step Solution

1
Analyze Interpositioning
Identified as introducing a redundant middleman between the broker-dealer and the market maker.
Broker-dealers must seek best execution; inserting an unneeded intermediary violates FINRA Rule 5310.
2
Analyze Front Running
Identified as trading ahead of a pending customer block transaction.
Using nonpublic knowledge of imminent large order flow for proprietary advantage violates FINRA Rule 5270.
3
Analyze Marking the Close
Identified as manipulating end-of-day market prices.
Executing transactions specifically timed at market close to alter valuation reports or margin calls is prohibited market manipulation.
4
Analyze Free-riding
Identified as selling securities in a cash account before paying for the purchase.
Regulation T requires full payment for cash account transactions; using sale proceeds to pay for the buy constitutes free-riding and incurs a 90-day account freeze.

Key Concept

Prohibited Market Manipulation and Fraudulent Practices
Estimated Time:1m 30s
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Prohibited Market Manipulation and Fraudulent Practices