An individual investor opens accounts at two separate brokerage firms under the same name and tax identification number. Over several trading sessions, the investor places simultaneous buy and sell orders of equal size for a thinly traded equity security between these two accounts, resulting in no net change in beneficial ownership, solely to create the appearance of active trading volume and induce others to trade. Which of the following statements correctly identifies this prohibited practice and its regulatory standing?
- AThe activity is spoofing, because placing offsetting orders across separate firm accounts creates false market depth designed to trick algorithmic traders into cancelling existing quotes.
- The activity is wash trading, a fraudulent market manipulation tactic prohibited under federal securities laws and self-regulatory organization (SRO) rules.Cevap
- CThe activity is wash trading, which violates self-regulatory organization (SRO) ethical guidelines but falls outside the statutory enforcement jurisdiction of the Securities and Exchange Commission (SEC).
- DThe activity is an unauthorized principal dealer markup violation, caused by the broker-dealers failing to execute the trades in an agency capacity.
Cevap
The activity is wash trading, a fraudulent market manipulation tactic prohibited under federal securities laws and self-regulatory organization (SRO) rules.
Executing matching buy and sell orders that result in no beneficial ownership change to fabricate artificial trading volume is the exact definition of wash trading. Wash trading is illegal under Section 9(a)(1) of the Securities Exchange Act of 1934 and FINRA Rule 2010.
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Wash Trading and Market Manipulation Prohibitions