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Difficulty: MediumProhibited Market Manipulation and Fraudulent Practices

Match each prohibited securities industry practice with its corresponding regulatory definition under FINRA and SEC rules.

  • FreeridingPurchasing a security in a cash account and subsequently selling the position prior to paying for the initial purchase in full.
  • InterpositioningInserting an unnecessary third party between a customer and the best available market, increasing customer transaction costs.
  • PeggingEntering buy or sell orders with the intent to artificially fix, stabilize, or maintain a security's market price.
  • Backing AwayFailing by a market maker to honor a published firm quote for at least the minimum specified quantity.

Answer

The correct pairings are: Freeriding matches purchasing a security and selling it before paying for the trade; Interpositioning matches inserting an unnecessary third party between a customer and the best market; Pegging matches entering trades to artificially stabilize or fix a security's price; Backing Away matches a market maker's failure to honor its published firm quote.
Freeriding is a credit extension violation involving non-payment prior to sale. Interpositioning violates best execution by adding an unneeded intermediary. Pegging artificially fixes market price levels. Backing away is a breach of a market maker's duty to trade at published quotes.

Step-by-Step Solution

1
Analyze each prohibited practice name on the left.
Identified four distinct regulatory violations: Freeriding, Interpositioning, Pegging, and Backing Away.
Clear categorization of industry definitions prevents confusion between trading conduct violations and quote integrity rules.
2
Match Freeriding with cash account settlement rules.
Pairs Freeriding with selling securities before paying for their initial purchase.
Federal Reserve Regulation T prohibits trading on unsettled funds without paying for the position first.
3
Match Interpositioning with order execution routing rules.
Pairs Interpositioning with inserting an unnecessary intermediary between customer and market.
FINRA Rule 5310 requires best execution, forbidding unnecessary intermediate fees.
4
Match Pegging and Backing Away with market maker and pricing obligations.
Pairs Pegging with artificial price stabilization and Backing Away with failing to honor firm market maker quotes.
Pegging manipulates fair supply and demand, while Backing Away violates market maker firm quote requirements.

Key Concept

Prohibited Market Manipulation and Trading Violations
Estimated Time:1m 15s
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Prohibited Market Manipulation and Fraudulent Practices