An institutional trader seeking to purchase a large position in a thinly traded equity security intentionally places a series of large buy orders well above the current bid price without intending to execute them. As soon as other market participants raise their offer prices in response to the apparent buying interest, the trader cancels the large buy orders and executes a purchase order at the newly created, higher price level. Which of the following correctly identifies this manipulative practice and the primary regulatory concern associated with it?
- This practice constitutes spoofing, which is prohibited because it involves entering non-bona fide orders to deceive other market participants about supply and demand.Answer
- BThis practice constitutes wash trading, which is prohibited because the trader is executing offsetting trades that result in no beneficial change of ownership.
- CThis practice constitutes legitimate market making, which is permitted as long as the firm operates in a dealer capacity charging a mark-up rather than an agent capacity.
- DThis practice constitutes spoofing, but enforcement authority rests exclusively with FINRA because federal regulatory bodies like the SEC lack jurisdiction over order routing practices.
Answer
The practice is spoofing, an illegal market manipulation tactic involving the placement and subsequent cancellation of non-bona fide orders to create a false impression of market demand.
Spoofing is an illegal market manipulation tactic defined by entering quotes or orders with the explicit intent to cancel them before execution. This generates false signals about market supply or demand to artificially move security prices for financial gain.
Step-by-Step Solution
Key Concept
Spoofing and Market Manipulation Regulations
Estimated Time:1m 30s