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Question

Difficulty: EasyProhibited Market Manipulation and Fraudulent Practices

Match each prohibited market practice with its correct regulatory definition.

  • InterpositioningInserting an unnecessary third party between a customer and the best market price to generate added commissions.
  • Backing AwayFailing to honor a firm quote to buy or sell a security at a stated price and size.
  • Matched OrdersExecuting transactions between colluding accounts to create a misleading appearance of active trading volume.
  • FreeridingPurchasing securities in a cash account and selling them before making full payment for the initial buy transaction.

Answer

Interpositioning matches with inserting an unnecessary third party; Backing Away matches with failing to honor a firm quote; Matched Orders matches with executing transactions between colluding accounts; Freeriding matches with purchasing securities in a cash account and selling them before paying.
Each practice directly corresponds to its regulatory violation under FINRA and SEC rules: Interpositioning unnecessarily inserts an intermediary; Backing Away violates market maker quote integrity; Matched Orders artificially creates fake volume; Freeriding violates Federal Reserve Regulation T cash account settlement requirements.

Step-by-Step Solution

1
Identify the definition of Interpositioning.
Interpositioning refers to inserting an unnecessary broker-dealer in a trade chain to add fees.
FINRA rules mandate best execution without unnecessary intermediaries.
2
Identify the definition of Backing Away.
Backing away occurs when a market maker refuses to execute at their displayed firm quote.
Market makers are required to honor published quotes during normal market hours.
3
Identify the definition of Matched Orders.
Matched orders are pre-arranged trades between colluding participants to fake trading volume.
This is a prohibited market manipulation tactic designed to mislead investors.
4
Identify the definition of Freeriding.
Freeriding is buying and selling a security in a cash account without depositing payment for the purchase.
Federal Reserve Board Regulation T requires settlement payment prior to using sales proceeds to cover the cost.

Key Concept

Definitions of Prohibited Market Practices and Fraudulent Activities under SEC and FINRA Rules
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Prohibited Market Manipulation and Fraudulent Practices