Securities Industry Essentials (SIE) ExamOverview of Regulatory FrameworkMedium
A broker-dealer firm's research department publishes a report recommending a 'Strong Buy' for ABC Corp. stock. Days later, a senior analyst from the same department places a large personal order for ABC Corp. stock. This action would most likely be considered a violation of which ethical principle or regulation?
- AThe Know Your Customer (KYC) rule
- BMarket manipulation
- CFront-running
- DThe Best Execution rule
Show answer & explanationAnswer & explanation
Correct answer: C. Front-running
Front-running occurs when a broker or other financial professional executes trades for their own account or accounts they manage, based on advance knowledge of a pending customer order or research report that is likely to affect the market price.
Why the other options are wrong
- A. KYC requires firms to know their clients' financial situations and investment objectives, which is irrelevant to an analyst's personal trading.
- B. Market manipulation involves intentionally deceiving investors or artificially affecting prices, which is broader than this specific scenario.
- D. Best Execution requires firms to seek the most favorable terms for customer orders, not to prevent personal trading based on research.
Front-Running
Front-running is an unethical and illegal practice where a broker or analyst executes trades on their own account or for favored clients, based on prior knowledge of a pending customer order or a firm's research report that will likely move the market.
- Involves using non-public information.
- Creates an unfair advantage for the professional.
- Violates fiduciary duties and market integrity.
Memory trick: Unfair trades break the market's trust.