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Difficulty: HardProhibited Market Manipulation and Fraudulent Practices

A compliance officer at a member broker-dealer is conducting a review of trade execution practices and trading account activities. Match each prohibited market practice with the scenario that accurately describes the violation.

  • InterpositioningRouting a customer's order through an unnecessary third-party broker-dealer, depriving the customer of best execution.
  • FreeridingPurchasing a security and selling it prior to settlement without depositing full payment for the initial trade.
  • Marking the CloseSubmitting orders near the final market bell specifically to influence the published settlement price of a security.
  • Painting the TapeExecuting coordinated trades among accounts to generate a false public appearance of heavy market liquidity and interest.

Answer

Interpositioning matches routing customer orders through an unnecessary third-party broker-dealer; Freeriding matches purchasing securities and selling them prior to settlement without depositing payment; Marking the Close matches submitting orders near the final market bell to influence settlement price; Painting the Tape matches executing coordinated trades to generate a false public appearance of liquidity.
Each listed practice represents a distinct statutory or regulatory violation under FINRA and SEC rules. Interpositioning violates best execution duties by adding redundant intermediaries. Freeriding violates Regulation T payment requirements. Marking the close artificially manipulates closing prices. Painting the tape deceives the public regarding genuine market liquidity through collusive trade reporting.

Step-by-Step Solution

1
Analyze trade execution requirements under FINRA Rule 5310 (Best Execution).
Identify that inserting a third-party intermediary that degrades pricing or adds transaction fees constitutes interpositioning.
Broker-dealers are obligated to use reasonable diligence to ascertain the best market for the subject security.
2
Evaluate Federal Reserve Regulation T settlement rules.
Determine that buying securities and selling them prior to paying for the purchase is freeriding, which results in a 90-day account freeze.
Payment for cash account purchases must be received prior to liquidating the same security.
3
Examine order timing and market manipulation schemes.
Match late-day orders designed to alter published closing quotes with marking the close, and collusive wash/matched trades aimed at faking volume with painting the tape.
Both practices intentionally distort market pricing and trade transparency to deceive investors.

Key Concept

Prohibited Market Manipulation and Trade Execution Practices
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Prohibited Market Manipulation and Fraudulent Practices