Institutional Trading Practices
Conduct on the desk
Institutional trading practices questions test whether candidates can recognise manipulative and deceptive conduct. Know the categories: wash trading, pre-arranged trading outside permitted rules, spoofing, marking the close, and front-running. Understand that intent matters - the same pattern of orders may be legitimate or manipulative depending on purpose.
Concepts to master
Understand the distinction between agency and principal capacity, and the disclosure obligations that attach to each. Know the rules on cross trades and when client consent is required. Understand the handling of large orders, including the use of iceberg or reserve orders and the risk of information leakage. Know the restrictions on trading ahead of client orders and on trading in the same security as a client. Understand the concept of a restricted list and the wall between research and trading.
Traps
A common trap is assuming that a trade executed at a fair price cannot be manipulative. Manipulation is about the integrity of the price formation process, not the fairness of the individual price. Another trap is confusing front-running with legitimate hedging of a client order; hedging is permitted when it does not disadvantage the client. Watch for scenarios where a trader places orders with no intent to execute - that is the hallmark of spoofing.
Worked example
A trader enters large buy orders to create the appearance of demand, cancels them before execution, and sells into the resulting price rise. The conduct is manipulative even if every individual order was permissible in isolation, because the intent was to mislead the market.
Rule of thumb
Ask what the market would have concluded if it had seen the full picture. If the answer is a false impression, the conduct is likely manipulative.