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Difficulty: EasyProhibited Market Manipulation and Fraudulent Practices

An investor simultaneously enters matching buy and sell orders for the same security through two distinct accounts, resulting in artificial volume with no actual change in beneficial ownership. Which prohibited market manipulation practice is being committed?

  1. Wash tradingAnswer
  2. B
    Spoofing
  3. C
    Dealer principal trading
  4. D
    SRO criminal enforcement

Answer

Wash trading is the prohibited market practice of executing matching buy and sell orders in a security with no genuine change in beneficial ownership to create a false impression of volume and market interest.
The correct choice identifies wash trading, which is the fraudulent act of creating illusory market activity by buying and selling the same security simultaneously without any real change in beneficial ownership. This deceives other market participants regarding liquidity and demand.

Step-by-Step Solution

1
Analyze the characteristics of the trading scenario.
The trader places offsetting buy and sell orders at the same time, producing no net shift in ownership.
Identifying whether beneficial ownership changes is the primary distinction when identifying wash trading violations.
2
Correlate the scenario features with FINRA and SEC prohibited activity definitions.
Creating deceptive volume without beneficial ownership movement is defined as wash trading.
Distinguishing wash trading from non-bona fide order tactics (spoofing) ensures accurate regulatory evaluation.

Key Concept

Wash Trading
Estimated Time:1m 0s
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Topics

Prohibited Market Manipulation and Fraudulent Practices