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Difficulty: HardProhibited Market Manipulation and Fraudulent Practices

Match each prohibited market practice or fraudulent activity with the scenario that best exemplifies its violation under FINRA and SEC rules.

  • Front-RunningA registered representative executes buy orders in a personal account immediately before executing an institutional client's large block buy order for the same security.
  • ChurningA registered representative engages in excessive trading volume in a customer's discretionary account primarily to generate additional commission revenue.
  • Free-RidingAn investor purchases shares in a cash account and sells the same position prior to settlement without depositing full payment for the original purchase.
  • Marking the CloseA trader intentionally places orders at or near the end of the trading day to artificially inflate a security's reported closing price.

Answer

Front-Running matches with executing personal orders prior to a client block order; Churning matches with excessive trading in a discretionary account to generate commissions; Free-Riding matches with selling securities in a cash account prior to settling the purchase; Marking the Close matches with entering trade orders near market close to manipulate the closing price.
Front-running involves trading ahead of customer block orders; churning represents excessive account trading to generate commissions; free-riding is selling unpaid securities in a cash account; marking the close refers to manipulating reported closing prices near market end.

Step-by-Step Solution

1
Analyze each prohibited market practice term provided in the left list.
Identified four distinct regulatory violations: Front-Running, Churning, Free-Riding, and Marking the Close.
Accurate matching requires isolating the defining regulatory characteristics of each practice.
2
Differentiate trading ahead of block orders from general insider trading or market manipulation.
Front-Running specifically addresses taking financial advantage of nonpublic advance knowledge of an impending customer block trade.
The key trigger is prior knowledge of material pending customer orders.
3
Distinguish between account control abuse and cash account settlement violations.
Churning requires control over the account and excessive turnover to generate fees, whereas Free-Riding involves non-payment in cash accounts under Regulation T.
Churning is a suitability and fiduciary breach by the broker, whereas Free-Riding is a payment settlement failure under margin regulations.
4
Correlate timing-based order entries with price manipulation terms.
Marking the Close specifically refers to entering transactions at market close to influence reported settlement prices.
Closing prices drive benchmark valuations, collateral calculations, and margin requirements.

Key Concept

Classification of Prohibited Market Manipulation and Fraudulent Practices
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Prohibited Market Manipulation and Fraudulent Practices