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Difficulty: MediumProhibited Market Manipulation and Fraudulent Practices

Match each prohibited market practice regulated under FINRA and SEC rules with the scenario that best exemplifies it.

  • SpoofingEntering non-bona fide orders that are canceled prior to execution to create a false impression of market interest and manipulate security prices.
  • FreeridingPurchasing shares in a cash account and selling them before paying for the original purchase by the settlement deadline.
  • PeggingEntering buy or sell orders for a security to artificially prevent its price from moving past a specific target level.
  • Front-RunningExecuting personal or firm trades in a security ahead of a known, pending block order from a customer to capitalize on the expected price movement.

Answer

Spoofing matches entering non-bona fide orders canceled before execution; Freeriding matches buying and selling securities in a cash account without paying for the purchase; Pegging matches executing transactions to hold a security's price at a target level; Front-Running matches trading personal or firm accounts ahead of a known customer block order.
Each practice directly aligns with its regulatory definition: Spoofing uses non-bona fide canceled orders; Freeriding violates payment timelines under Regulation T; Pegging artificially anchors market prices; and Front-Running exploits pending customer block orders for personal or firm gain.

Step-by-Step Solution

1
Analyze the trading scenario involving non-bona fide orders.
Identify that submitting and canceling quotes to deceive market participants constitutes Spoofing.
Spoofing intentionally creates a false illusion of liquidity or price pressure.
2
Analyze the scenario involving buying and selling in a cash account prior to payment settlement.
Identify that using sale proceeds to pay for the purchase of the same security is Freeriding.
Federal Reserve Regulation T mandates that purchases in cash accounts must be fully paid for before using proceeds from sale.
3
Analyze the scenario involving artificial price stabilization at a target level.
Identify that attempts to hold a stock at a specific price point is Pegging.
Pegging is an illegal form of price manipulation designed to keep a security's market price pinned at a desired level.
4
Analyze the scenario of trading prior to a client block trade.
Identify that taking positions ahead of an imminent, unexecuted customer block order is Front-Running.
FINRA Rule 5270 prohibits trading ahead of pending institutional block orders to gain an unfair advantage.

Key Concept

Prohibited Market Manipulation and Fraudulent Practices
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Prohibited Market Manipulation and Fraudulent Practices