Integrity of Capital Markets - II(B) Market Manipulation

LOS

What is Standard II(B) of the SoPC? Market Manipulation

What is the primary directive of Standard II(B), Market Manipulation? Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

a. demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations of issues involving issues of personal integrity

Flash cards

What is market manipulation? Market manipulation is a deliberate attempt to interfere with the free and fair operation of the market. It includes practices that distort security prices or trading volume with the intent to deceive people or entities that rely on information in the market.

Does Standard II(B) prevent strategies that exploit a difference in market power, information, and market inefficiencies? Why? No, these are legitimate trading strategies because the intent is not to deceive. These strategies are valid.

Does Standard II(B) prevent transactions done for tax purposes? (I.e. selling and immediately buying back the stock) No, it does not prevent transactions done for tax purposes as long as the intent is not to deceive others.

b. distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards

Flash cards

What are five ways somebody can do market manipulation? 1. Price manipulation 2. Marking the close or ramping 3. Wash trades and pre-arranged trading 4. False or misleading information 5. Capping and pegging

What is price manipulation? Price manipulation is placing buy or sell orders (or both) into the trading system in order to change or maintain the price of a stock.

What are three ways that price manipulation could help a trader? 1. Increase the value of a position in the market for finance or accounting purposes 2. To be able to issue new shares at a higher price 3. To cause a price rise so that other investors are attracted to buying the stock, creating demand that the manipulator can sell into (pump and dump)

What is “pump and dump”? Pump and dump is market manipulation, using fake trades to pump up the price of a stock, creating demand that the manipulator can sell into.

What is “marking the close” or “ramping”? Marking the close is making a purchase or sale of stock right before the close of trading in order to “mark” the price and affect the published closing price.

Why would somebody “mark the close”? A trader may want to avoid a margin call, support a flagging price, or affect the valuation of a portfolio.

What is a common indicator of “marking the close” or “ramping”? Trading in small parcels of the security just before the market closes.

What is a “wash trade”? A wash trade is a trade in which there is no change in the beneficial ownership of the securities - the buyer is, in reality, also the seller.

What is a pre-arranged trade and why would somebody do it? A pre-arranged trade involves two parties trading on the basis that the transaction will be reversed later, or with an arrangement that removes the risk of ownership from the buyer.

What is “pooling” or “churning” and why would somebody do it? “Pooling or churning” can involve wash sales or pre-arranged trades executed in order to give an impression of active trading, and therefore investor interest, in the stock.

Why would a company be tempted to release false or mis-leading information? Companies can be tempted to re-release information or present information in an over-optimistic manner, in order to generate interest in the company’s securities or help a flagging market.

Why is “hype and dump”? If a company releases false or misleading information that includes unrealistic, unsubstantiated, or incorrect data in order to generate demand for a stock.

What is “capping” and “pegging”? A trader writes an option, which obliges the trader to sell to (in the case of a call option) or buy from (in the case of a put option) the option holder a specified number of shares at a specified price. The trader then trades in the shares covered by the option in order to affect the share price in a direction that will make the option unprofitable to exercise. This involves activity on both the stock market and the derivatives market.

c. recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct

Flash cards