Examkin

Question

Difficulty: MediumProhibited Market Manipulation and Fraudulent Practices

A compliance officer at a member firm is reviewing surveillance reports monitoring electronic trading activity. Which of the following trading activities identified during the review represent prohibited market manipulation or fraudulent practices under securities regulations?

  1. Entering non-bona fide orders for equity securities with the intent to cancel them prior to execution to create a false impression of market interestAnswer
  2. Executing matching buy and sell orders in a security where there is no actual change in beneficial ownershipAnswer
  3. C
    Selling equity securities directly to a retail client from the firm's inventory while charging a fair and reasonable mark-up
  4. D
    Initiating formal criminal proceedings and handing down imprisonment sentences to individual traders who commit market fraud

Answer

Entering non-bona fide orders to create fake market depth (spoofing) and executing offsetting transactions with no change in beneficial ownership (wash trading) are both prohibited fraudulent market practices.
Both spoofing (placing non-bona fide orders intended to be canceled before execution) and wash trading (buying and selling securities with no actual shift in beneficial ownership) are explicit forms of prohibited market manipulation designed to mislead market participants.

Step-by-Step Solution

1
Evaluate the first practice: entering non-bona fide orders intended to be canceled before execution.
Identify this practice as spoofing.
Spoofing tricks market participants by giving a false appearance of market liquidity or pressure, violating federal securities laws and SRO rules.
2
Evaluate the second practice: executing matching orders with no beneficial ownership change.
Identify this practice as wash trading.
Wash trading creates fake trading volume and tricks investors into thinking a security is active or highly liquid, which is prohibited.
3
Evaluate the third practice: selling inventory to clients with a fair mark-up.
Recognize this as standard dealer activity.
Broker-dealers regularly act in a principal capacity, buying and selling securities from inventory with reasonable mark-ups or mark-downs.
4
Evaluate the fourth practice: SROs bringing criminal charges and prison sentences.
Recognize this as exceeding SRO jurisdictional authority.
SROs can fine, censure, or bar individuals from the industry, but only governmental bodies like federal or state prosecutors can pursue criminal sanctions.

Key Concept

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

Topics

Prohibited Market Manipulation and Fraudulent Practices