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Difficulty: EasyProhibited Market Manipulation and Fraudulent Practices

An investor simultaneously places matching buy and sell orders for the same security across different accounts, resulting in no change in beneficial ownership, to create a false impression of active trading volume. Which prohibited market manipulation practice is being committed?

  1. Wash tradingAnswer
  2. B
    Spoofing
  3. C
    Criminal prosecution by an SRO
  4. D
    Acting in an agency capacity as a broker

Answer

Wash trading is the prohibited practice of executing transactions that involve no actual change in beneficial ownership to create a misleading appearance of active market volume.
Wash trading occurs when an investor or firm enters matching buy and sell orders that result in no actual change of beneficial ownership, solely to generate fictitious volume and deceive market participants about security liquidity.

Step-by-Step Solution

1
Analyze the trading activity described in the scenario
Matching buy and sell orders were executed with zero change in beneficial ownership.
Identifying whether ownership changed is the key distinction between legitimate trading and fictitious volume generation.
2
Determine the regulatory classification of this activity
Creating fictitious volume without altering ownership constitutes wash trading, which is strictly prohibited under securities laws.
The intent of wash trading is to manipulate market interest and mislead other investors.

Key Concept

Wash Trading and Market Manipulation
Estimated Time:45s
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Topics

Prohibited Market Manipulation and Fraudulent Practices