A registered representative learns that their firm's research department is about to release a 'buy' recommendation on XYZ stock, which is currently trading at $20. The representative immediately buys 1,000 shares of XYZ stock for their personal account before the recommendation is published. This action is considered:
- AAn acceptable use of insider information.
- BPermitted under 'de minimis' trading rules.
- CFront-running, which is a prohibited activity.
- DA legitimate personal investment by the representative.
Show answer & explanationAnswer & explanation
Correct answer: C. Front-running, which is a prohibited activity.
This scenario describes front-running, which is a prohibited practice. Front-running occurs when a broker or other market participant executes trades for their own account before executing a client's orders or before a firm's research recommendation is released, in order to profit from the anticipated price movement. It is a violation of FINRA rules.
Why the other options are wrong
- A. Insider information used for personal gain is generally illegal, and front-running is a specific instance of this.
- B. There are no 'de minimis' rules that permit front-running in this context.
- D. While it's a personal investment, the timing based on non-public information makes it illegal.
Front-Running
The unethical and illegal practice of a broker or other market participant executing orders on a security for their own account or a proprietary account with advance knowledge of a pending large client order or a firm's research recommendation that is likely to affect the price of the security.
- Involves trading ahead of client orders or firm research.
- Done to profit from anticipated price movement.
- Prohibited by FINRA and securities laws.
- Considered a form of market manipulation.
Memory trick: Manipulation: Fake moves, unfair advantage, information abuse.