Securities Industry Essentials (SIE) ExamUnderstanding Trading, Customer Accounts, and Prohibited ActivitiesHard
A registered representative learns that their firm's research department is about to release a highly positive report on XYZ Corp., which is expected to significantly increase its stock price. The RR immediately purchases a substantial number of XYZ shares for their personal account before the report is made public. This action is best described as:
- AMarket manipulation
- BFront-running
- CInsider trading
- DSelf-dealing
Show answer & explanationAnswer & explanation
Correct answer: B. Front-running
Front-running occurs when a broker or other financial professional executes trades for their own account or accounts they control, based on advance knowledge of pending orders or research reports that will likely affect the market price. This is a prohibited activity.
Why the other options are wrong
- A. Market manipulation involves actions designed to artificially influence prices, like spreading false rumors, not just trading ahead of research.
- C. While similar, insider trading involves non-public information from inside the company. Front-running involves non-public information about market-moving events (like a firm's own research).
- D. Self-dealing is a broader term for acting in one's own interest, but front-running is a more specific and accurate description of this scenario.
Front-Running
The unethical and illegal practice of a broker executing orders on a security for their own account based on advance knowledge of pending orders or research reports that will affect the market price.
- Involves trading ahead of a client's large order or firm's market-moving information.
- Considered a form of market abuse and a prohibited activity.
- Exploits non-public information for personal gain at the expense of others.
Memory trick: 'Front-Run' means you 'Jump the Line' with secret info.