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Difficulty: MediumProhibited Market Manipulation and Fraudulent Practices

A equity trader holding a large long position in an illiquid security enters a series of aggressive buy orders at prices above the prevailing market bid/ask spread during the final two minutes of the trading day. The primary intention of placing these orders is to push up the security's official closing price and inflate the reported valuation of the firm's portfolio. Which of the following prohibited market practices has the trader committed?

  1. Marking the close, because orders were deliberately entered near the end of the trading day to artificially manipulate the closing price.Answer
  2. B
    Wash trading, because the trades were placed to create the false appearance of active trading volume without altering beneficial ownership.
  3. C
    Unlawful principal trading, because the firm executed trades from its own inventory without obtaining prior written customer authorization.
  4. D
    Criminal non-compliance, because FINRA holds direct regulatory power to bring felony criminal charges and incarcerate individuals for market manipulation.

Answer

Marking the close, because orders were deliberately entered near the end of the trading day to artificially manipulate the closing price.
Marking the close occurs when market participants intentionally enter buy or sell orders near the end of the trading day to influence the final reported trade price. This is a prohibited form of market manipulation designed to distort market valuations or margin requirements.

Step-by-Step Solution

1
Analyze the trader's action and timing in the given scenario.
The trader entered buy orders at above-market prices during the final minutes of the trading session.
Timing and order positioning relative to the market close are key factors in identifying specific manipulative practices.
2
Identify the intent behind the orders.
The intent was to inflate the official end-of-day closing price and boost portfolio valuation.
Artificially affecting a security's closing price violates securities laws regarding market manipulation.
3
Match the behavior to regulatory definitions of market manipulation.
Entering orders near the market close to distort closing prices is defined as 'marking the close'.
This contrasts with wash trading (no change in beneficial ownership), front running (trading ahead of customer block orders), or spoofing (entering non-bona fide orders intended to be canceled).

Key Concept

Marking the Close
Estimated Time:1m 15s
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Topics

Prohibited Market Manipulation and Fraudulent Practices