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Difficulty: MediumProhibited Market Manipulation and Fraudulent Practices

An investor places offsetting buy and sell orders for 5,000 shares of a security at the exact same price across two separate accounts held under the investor's identical ownership. The simultaneous trades create the appearance of active market interest on the public exchange tape, attracting retail buyers to the stock, even though no actual transfer of beneficial ownership took place. Which prohibited market manipulation practice has the investor engaged in?

  1. Wash tradingAnswer
  2. B
    Spoofing
  3. C
    Legitimate principal market making
  4. D
    Interpositioning

Answer

The investor engaged in wash trading by executing matching buy and sell transactions under the same beneficial ownership to generate artificial trading volume.
Executing matching buy and sell orders where no change in beneficial ownership occurs is the definition of wash trading. The primary goal of wash trading is to create misleading financial information regarding trading volume or market interest in a security.

Step-by-Step Solution

1
Analyze the ownership structure and trade execution pattern
The investor executed simultaneous buy and sell orders for identical share quantities and prices across accounts with identical beneficial ownership.
Identifying whether beneficial ownership changes is key to distinguishing market manipulation from legitimate trading activity.
2
Evaluate the intent and market effect
The trades created artificial volume on the exchange consolidated tape without economic risk to the trader.
Creating false activity to mislead other investors constitutes prohibited market manipulation under securities laws.
3
Match the scenario characteristics to the regulatory definition
Executing offsetting orders without altering beneficial ownership is defined specifically as wash trading.
FINRA rules and federal securities laws strictly prohibit wash trades due to their deceptive nature.

Key Concept

Prohibited Market Manipulation - Wash Trading
Estimated Time:1m 0s
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Topics

Prohibited Market Manipulation and Fraudulent Practices