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Difficulty: EasyProhibited Market Manipulation and Fraudulent Practices

An investor places several large buy orders for a stock significantly above the prevailing market price without intending to execute them. The sole purpose of these orders is to create a false impression of high buying demand in order to artificially push up the stock price so the investor can sell existing shares at inflated prices. Which prohibited market practice does this conduct represent?

  1. SpoofingAnswer
  2. B
    Wash trading
  3. C
    Market making in a principal capacity
  4. D
    Self-regulatory organization enforcement

Answer

Spoofing
Spoofing is the prohibited practice of submitting quotes or orders with the intent to cancel them prior to execution, creating a illusion of buying or selling interest to manipulate market prices.

Step-by-Step Solution

1
Analyze the trader's activity and intent described in the scenario
The trader is submitting non-bona fide orders with the specific intention to cancel them before execution.
Determining whether orders are intended for execution or cancellation helps distinguish legitimate order flow from fraudulent quote placement.
2
Match the behavior to standard securities industry definitions of prohibited practices
Entering orders without intent to execute in order to create fake supply or demand signals is defined as spoofing under SEC and FINRA rules.
Spoofing creates misleading market signals that deceive other market participants.

Key Concept

Prohibited Market Manipulation and Fraudulent Practices
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Prohibited Market Manipulation and Fraudulent Practices