Market Conduct: Short Selling, Market Manipulation, Front-Running, and Disclosure
This domain tests market-abuse rules and disclosure duties that apply to a foreign securities branch’s proprietary, sales, and research activities.
Short selling
Naked short selling is prohibited. A short sale requires a borrowing or stock-lending arrangement, and price and reporting rules apply. Short-position reporting and disclosure obligations must be monitored. Market manipulation includes wash trades, fictitious orders, price pegging, and other devices that create a false market.
Front-running and disclosure
Front-running is trading ahead of a client order using confidential order information. It breaches unfair trade practice rules and information barriers. Disclosure obligations include the 5% bulk-holding report for listed shares and timely disclosure by listed companies. Insider trading prohibitions apply to material undisclosed information.
Worked example
A proprietary trader learns that a client is about to place a large buy order in a listed stock. The trader buys futures before the client order is executed. This is front-running: confidential client order information was misused. Even if there is no separate manipulation, it breaches unfair trade practice rules and the branch’s information barriers.
Traps
Calling a naked short “covered” without a locate; treating front-running as an equity-only issue; missing the 5% filing; ignoring derivative disclosures; failing to separate research from trading.