Question 1

What is 'painting the tape' in securities trading?

Accepted Answer

Painting the tape is a form of market manipulation where traders execute a series of transactions between themselves to create the false appearance of active trading volume, misleading other investors about a security's activity.

Question 2

What is a 'pump and dump' scheme?

Accepted Answer

A pump and dump scheme involves artificially inflating a stock's price through false or misleading statements (the pump), then selling the inflated shares at a profit before the price collapses (the dump), leaving other investors with losses.

Question 3

What is 'front-running' and why is it prohibited?

Accepted Answer

Front-running occurs when a broker executes trades in their own account based on advance knowledge of pending client orders, profiting from the anticipated price movement caused by those orders. It is prohibited because it places the broker's interests ahead of the client's.

Question 4

What is 'spoofing' in securities markets?

Accepted Answer

Spoofing is placing large buy or sell orders with the intent to cancel them before execution, creating a false impression of supply or demand to manipulate prices. It is illegal under the Dodd-Frank Act.

Question 5

What is the legal definition of insider trading under securities law?

Accepted Answer

Insider trading is the buying or selling of a security based on material, non-public information (MNPI) in breach of a fiduciary duty or other relationship of trust. Both the tipper who shares the information and the tippee who trades on it can be held liable.

SIE Exam: Prohibited Practices

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