In order to protect the integrity of the securities markets, FINRA has put in place rules that prohibit various activities known as market manipulation. In this post, we will define what market manipulation is and provide examples of the different types of manipulation. It is important for SIE exam candidates to understand these concepts so that they can identify potential violations and report them to FINRA.

At its core, market manipulation is the use of deceptive or fraudulent tactics to create artificial market conditions and profit from these conditions at the expense of other investors. There are many different types of market manipulation, including market rumors, pump and dump schemes, front running, excessive trading, marking the close and open, backing away from trades, and freeriding.

One common form of market manipulation is known as a "market rumor." In this type of manipulation, false or misleading information about a company or security is deliberately circulated in an attempt to influence prices. For example, if there were concerns that a particular stock was about to experience a major price decline due to negative news about the company's business performance, someone might spread false rumors about the company in an attempt to drive down its stock price.

Another form of market manipulation is the "pump and dump" scheme, where individuals or groups buy up a large quantity of shares in a company or security and then artificially inflate prices by issuing false or misleading statements about the company's prospects. Once the manipulated stock prices have reached a certain level, these individuals will unload their shares at a profit, leaving other investors with losses.

Other types of manipulation include front running, excessive trading, marking the close and open, backing away from trades, and freeriding. Front running is when someone uses confidential information about another investor's planned transactions to make money for themselves. Excessive trading refers to any type of excessively frequent trading in a security, which could be done to artificially boost trading volume or profits. Marking the close and open is when investors engage in trades just before the market closes or opens, attempting to take advantage of pricing changes that occur at these times. Backing away from trades describes any situation where an investor fails to honor previous commitments or orders, perhaps in order to manipulate prices or avoid losses. Freeriding describes situations where investors do not contribute their fair share towards the cost of executing stock transactions.

Ultimately, it is crucial for SIE exam candidates to understand the various forms of market manipulation so that they can recognize potential violations and report them to FINRA. By being vigilant about manipulative activities and ensuring that markets remain fair and transparent, we can help protect the interests of all investors.

These and many other topics will be covered on the SIE exam. Achievable offers comprehensive SIE exam prep to prepare you for the SIE Exam. Sign up today to get started on your SIE prep!