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Difficulty: EasyProhibited Market Manipulation and Fraudulent Practices

An investor places a large buy order for a security without the intention of executing it, aiming to create a false impression of buying interest and drive up the best bid price. Once other market participants increase their bids, the investor sells an existing position at the higher price and immediately cancels the initial buy order. Which prohibited market manipulation practice is described in this scenario?

  1. SpoofingAnswer
  2. B
    Wash trading
  3. C
    Interpositioning
  4. D
    Freeriding

Answer

Spoofing is the prohibited market practice described, as it involves placing fake orders intended for cancellation to manipulate market price levels.
Spoofing is an illegal market manipulation tactic where a participant submits non-bona fide orders that they intend to cancel before execution. The purpose is to create a illusion of market depth or price momentum to benefit another trade placed by the manipulator.

Step-by-Step Solution

1
Analyze the nature of the trading activity in the scenario.
The trader entered non-bona fide orders with the sole intention of canceling them once market prices shifted favorable to their actual trade.
Identifying whether orders are legitimate or intended to deceive determines the regulatory violation.
2
Match the observed activity to official FINRA/SEC market manipulation definitions.
Entering non-bona fide orders to lure other traders and then canceling those orders prior to execution is defined as spoofing.
Spoofing distorts market supply and demand signals.

Key Concept

Spoofing is a prohibited manipulative practice involving the entry of non-bona fide orders designed to deceive market participants regarding market supply/demand, followed by immediate cancellation.
Estimated Time:1m 0s
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Prohibited Market Manipulation and Fraudulent Practices