Market Integrity and Conduct: Fair Dealing, Manipulation, and Disclosure
The conduct standard
Market integrity rules aim to preserve fair, efficient, and confident markets. Candidates must understand fair dealing with clients, suitability of recommendations, conflict-of-interest management, and the prohibition on manipulative and deceptive trading. Know the concepts of marking the close, wash trading, spoofing, and painting the tape, and be able to distinguish each from legitimate trading activity.
Manipulation versus legitimate conduct
A trap is labelling any large or unusual order as manipulation. Manipulation requires intent to create a false or misleading appearance of trading activity or price. Legitimate market-making, hedging, and bona fide arbitrage are not manipulation. Another trap: assuming that because a trade was executed on a lit venue it cannot be manipulative - intent and effect matter, not venue.
Insider trading and disclosure
Understand the prohibition on trading or tipping while in possession of material non-public information, the firm's restricted list and watch list controls, and the duty to maintain confidentiality. Know the timely disclosure obligations of issuers and the firm's role in supervising employee trading and research independence.
Client-facing conduct
Know the standards for complaint handling, client communication, fee disclosure, and order handling (best execution, priority of client orders over firm orders, and allocation practices). Understand that a firm must not front-run client orders or misuse client information.
Rule of thumb
When a question describes unusual trading, ask: was there an intent to mislead, and did the conduct create a false appearance of price or activity? If neither is present, the conduct is likely legitimate.
Worked example
A representative buys for a client account just before placing a large firm order in the same security. The issue is not market manipulation but front-running and the priority of client orders - the firm must not trade ahead of client orders or use client information for the firm's benefit.