Chapter 5: Ethical Practices and Obligations - D. Market Manipulation

Question 1

Market Manipulation

Answer 1

If a broker/dealer induces the purchase or sale of a security by circulating false information (rumors) that the security’s price will or is likely to rise or fall, the firm is committing a form of market manipulation. Market manipulation is fraud.

Question 2

Wash Trades

Answer 2

Wash trades are trades that do not involve a change in ownership and are meant to create an illusion of increased trading activity in a security.

For example, an individual simultaneously purchases and sells the same security through different broker/dealers.

Question 3

Capping and pegging

Answer 3

Capping is illegally selling stock for the purpose of keeping the price low.

Pegging is illegally buying stock for the purpose of stabilizing the price.

Question 4

Matched orders

Answer 4

Matched orders occur when two traders act together to create the illusion of active trading in a security. One trader places a buy or sell order knowing that the other trader is placing a matching sell (in the case of a buy order) or buy (in the case of a sell order) at the same time.