A registered representative receives an institutional customer's order to purchase 250,000 shares of a publicly traded stock. Prior to entering the customer's order into the order management system, the representative places a personal buy order for 500 shares of the same stock in their personal trading account to profit from the price increase expected from the large customer transaction. Which of the following prohibited market practices has the representative committed?
- Front running, by trading ahead of a known pending block order from a customer.Answer
- BWash trading, by executing offsetting trades that simulate trading volume without changing beneficial ownership.
- CBroker-dealer role misrepresentation, by acting as a principal dealer during an agency execution.
- DA regulatory violation subject to criminal prosecution solely by FINRA under its independent statutory authority.
Answer
Front running, by trading ahead of a known pending block order from a customer.
The correct answer identifies the activity as front running. Under industry regulations (specifically FINRA Rule 5270), no member firm or associated person may execute an order for a personal or proprietary account when they possess material, non-public information regarding an imminent customer block order in that security.
Step-by-Step Solution
Key Concept
Front Running (FINRA Rule 5270)