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Difficulty: Very hardProhibited Market Manipulation and Fraudulent Practices

A FINRA compliance examiner is conducting a comprehensive audit of trading desk activities across various market scenarios. Match each prohibited market manipulation or fraudulent trading practice identified during the audit on the left with its specific market conduct violation description on the right.

  • InterpositioningA broker-dealer routes a customer order through a secondary broker-dealer without demonstrating that the routing achieved a better price for the customer.
  • Marking the CloseA trader executes a series of orders near the end of the trading day to artificially manipulate the reported closing price of a security.
  • Backing AwayA market maker fails to honor a published firm quote for at least the minimum trading unit when an order is presented at that price.
  • FreeridingAn investor purchases securities in a cash account and sells those same securities before paying for the original purchase.

Answer

Interpositioning matches with routing customer orders through an unnecessary broker-dealer; Marking the Close matches with executing trades near the end of the trading day to alter the closing price; Backing Away matches with a market maker failing to honor a published firm quote; Freeriding matches with buying and selling securities in a cash account before depositing funds for the original purchase.
Each trading practice is accurately matched to its regulatory definition: Interpositioning represents unnecessary third-party order routing; Marking the Close is late-day market manipulation; Backing Away violates market maker firm quote obligations; Freeriding violates Regulation T payment rules in cash accounts.

Step-by-Step Solution

1
Identify the definition of Interpositioning.
Interpositioning is the practice of placing a third party between a broker-dealer's customer and the best execution market, adding unnecessary fees unless a better price is proven.
Broker-dealers owe customers a duty of best execution under FINRA rules.
2
Identify the definition of Marking the Close.
Marking the Close refers to entering orders intentionally at or near the closing bell to manipulate the final price of the security.
Closing prices are widely monitored and affect portfolio valuation and margin calculations.
3
Identify the definition of Backing Away.
Backing Away is the failure of a market maker to honor its published quote when a market order or marketable limit order is presented.
Quotes displayed by market makers are required by FINRA rules to be firm up to the specified size.
4
Identify the definition of Freeriding.
Freeriding occurs when a customer pays for a purchase using proceeds from the sale of the exact same security before settling the original transaction.
Regulation T mandates full settlement payment prior to permitting withdrawal or re-investment of proceeds in cash accounts.

Key Concept

Prohibited Market Practices and Conduct Rules under FINRA and SEC Regulations
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Prohibited Market Manipulation and Fraudulent Practices