SIE Ready🚫 Prohibited Activities · Lesson 1 of 6 · 5 min
Fake Volume, Fake Prices
🎭 Markets work because prices and volume are supposed to be real. Manipulation fakes one or the other, or trades on orders that belong to someone else.
💡 Key idea
Fake volume (wash trades, matched orders, painting the tape), fake prices (pump and dump, marking the close, spoofing) and stolen order information (front running, trading ahead) are all prohibited.
🧠 Why it matters
FAKE VOLUME: a WASH TRADE is buying and selling with no real change in ownership; MATCHED ORDERS are prearranged offsetting orders; PAINTING THE TAPE is a run of trades that makes a stock look busy. FAKE PRICES: PUMP AND DUMP hypes a stock, then sells into the buying; MARKING THE CLOSE (or OPEN) trades near the bell to push the price; SPOOFING and LAYERING use orders meant to be canceled. MISUSED ORDER INFORMATION: FRONT RUNNING is trading ahead of an imminent customer block order (Rule 5270); TRADING AHEAD is a firm trading for itself at a price that would fill a customer order it holds (Rule 5320). Example: buying just before sending a customer's 100,000-share buy.
📈 In the real world
📈 A trader places large buy orders below the market in a thinly traded stock, watches others raise their bids, sells his real shares at the higher price, then cancels every buy order. He never meant to fill them. That is spoofing, and the cancel pattern is exactly what surveillance looks for.
📌 Takeaways
- Wash trades and matched orders fake activity; painting the tape is a series of them
- Marking the close and spoofing fake the price
- Front running and trading ahead put the firm or rep ahead of a customer's order
📖 Terms in this lesson
Front running: Trading ahead of a customer's large order, or a research report, to profit from the expected price move.
Wash trade: Buying and selling the same security with no real change in ownership to create false activity.
Matched orders: Coordinated buy and sell orders entered by colluding parties to create misleading activity or prices.
Pump and dump: Hyping a stock with false or misleading claims to raise its price, then selling into the rise.
Spoofing: Entering orders with no intent to execute them, to trick others about supply or demand, then canceling them.
Marking the close: Trading near the close to push a security's closing price up or down.
✅ Test yourself
An investor sells 5,000 shares from one of his accounts and buys the same 5,000 shares in another of his accounts to create the look of activity. What is this?
- Trading ahead
- Marking the close
- Front running
- A wash trade
Answer: D · A wash trade
There is no change in beneficial ownership, so it is a wash trade. Marking the close targets the closing price, and front running and trading ahead involve getting ahead of someone else's order.
A trader enters large orders she plans to cancel, hoping to move the price before trading the other way. What is this practice called?
- Matched orders
- Spoofing
- Painting the tape
- Pump and dump
Answer: B · Spoofing
Orders placed with the intent to cancel before execution, to move the price, are spoofing (layering when stacked at several prices). Matched orders and painting the tape involve trades that actually execute.
A rep learns that a mutual fund customer is about to buy a 200,000-share block and buys the stock for his own account first. What has the rep done?
- Front running
- Engaging in a wash trade
- Marking the open
- Painting the tape
Answer: A · Front running
Trading on advance knowledge of a customer's block order is front running. Marking the open targets the opening price, and painting the tape and wash trades fake volume rather than exploit someone's order.
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