A compliance officer at a member firm is reviewing proprietary and customer account activity to enforce SEC anti-manipulation provisions and FINRA ethics rules. Which of the following activities constitute illegal market manipulation or fraudulent practices? (Select all that apply.)
- Entering quotes into an electronic trading platform with the predetermined intent to cancel them before execution in order to create a misleading impression of market liquidity.Answer
- Executing simultaneous buy and sell transactions in a security across affiliated accounts where there is no actual change in beneficial ownership.Answer
- CExecuting a customer order in an agency capacity where the broker-dealer matches buyer and seller and charges a commission on the trade.
- DIssuing criminal indictments and arrest warrants directly by FINRA enforcement personnel against market manipulators without Department of Justice involvement.
Answer
The prohibited practices are entering non-bona fide quotes intended for cancellation before execution (spoofing) and executing offsetting transactions with no change in beneficial ownership to artificially inflate volume (wash trading).
Market manipulation includes any intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting market prices or volume. Submitting non-bona fide orders intended to be canceled before execution (spoofing) artificially moves bid/ask prices. Simultaneously buying and selling with no change in beneficial ownership (wash trading) creates false volume. Both practices are illegal fraudulent conduct under federal securities laws and SRO rules.
Step-by-Step Solution
Key Concept
Market Manipulation and Prohibited Fraudulent Trading Practices