Question

Difficulty: EasyProhibited Market Manipulation and Fraudulent Practices

An equity trader at a broker-dealer receives a customer market order to purchase 200,000 shares of a thinly traded stock. Before placing the customer's order into the market, the trader enters a buy order for 500 shares of the same stock in their personal account. Which prohibited market activity has the trader committed?

Front-runningAnswer
B
Wash trading
C
Unauthorized principal trading
D
SRO jurisdictional conflict

Answer

Front-running occurs when a registered representative trades for their own account ahead of a pending customer block order.

Front-running occurs when a broker-dealer or associated person enters a trade for their personal account while holding non-public information regarding an imminent customer block order.

Step-by-Step Solution

1

Analyze the trader's action relative to the incoming customer order.

The trader received a large customer order capable of moving the stock price and executed a personal trade beforehand.

Executing a personal trade ahead of a market-moving customer order exploits non-public order flow for personal gain.

2

Identify the regulatory classification for this prohibited conduct.

This conduct is classified as front-running under FINRA Rule 5270.

Front-running specifically covers taking a position in a security while holding non-public information about an impending customer block transaction.

Key Concept

Front-Running (Trading Ahead of Customer Block Orders)

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Topics

Prohibited Market Manipulation and Fraudulent Practices