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Question

Difficulty: EasyProhibited Market Manipulation and Fraudulent Practices

A registered representative receives a large block buy order for a security from an institutional client. Before executing the client's order, the representative purchases shares of the same security for their personal account to profit from the anticipated price increase. Which of the following prohibited market practices has the representative committed?

  1. Front runningAnswer
  2. B
    Wash trading
  3. C
    Free-riding
  4. D
    Exceeding SRO jurisdiction

Answer

Front running
The correct answer is front running because entering a personal trade prior to executing a customer's large block order to exploit the expected price impact is a direct violation of FINRA rules prohibiting trading ahead.

Step-by-Step Solution

1
Analyze the registered representative's actions in relation to customer orders
The representative prioritized their personal trade over an institutional customer's incoming block order.
The representative sought to profit from the price movement likely caused by the customer's large buy order.
2
Match the conduct to industry regulatory definitions
Trading ahead of a pending customer order for personal gain is defined as front running under FINRA and SEC rules.
Brokers and associated persons are strictly prohibited from placing their personal interests ahead of client order execution.

Key Concept

Front Running (Trading Ahead of Customer Orders)
Estimated Time:45s
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Topics

Prohibited Market Manipulation and Fraudulent Practices