Market Conduct, Fair Dealing, and Prohibited Practices (Manipulation, Insider Trading, Front-Running)
Scope
This domain tests fair dealing and prohibited market conduct: manipulation, insider trading, and front-running. Questions often turn on timing, intent, and whose order came first.
Core rules
- Manipulation includes wash sales, matched orders, fictitious trades, marking the close, and other conduct creating a false or misleading appearance of trading. Intent and market effect matter.
- Insider trading prohibits trading or tipping on material non-public information obtained through a duty or relationship. Tippees can be liable even if they did not originate the information.
- Front-running is trading for oneself or a favored account ahead of a known client order to profit from its expected price impact. It breaches client priority and fair dealing.
- Salesmen must not churn, make unauthorized trades, misrepresent, or misuse client information. Conflicts must be disclosed and managed.
Worked example
A salesman receives a large institutional buy order for a thin small-cap stock. Before entering the client order, he buys 20,000 shares for his own account, then executes the client order and sells into the price rise. This is front-running: the firm had a duty to handle the client order fairly and not trade ahead of it. The fact that the information came from a client order, not an issuer, does not make it acceptable.
Traps
Do not confuse front-running with insider trading; the source and duty differ. Information does not become safe merely because it is “rumored” or partially public. Proprietary trading after a client order is not automatically safe if it exploits the client’s market impact.