Prohibited Trading Activities

The prohibited-trading rules are the catalog of conduct that FINRA expects supervisors to detect, investigate, and stop. Each rule targets a different mechanism of harm: manipulation, front running, market-quality, customer protection, quotation integrity, and insider trading.

Publication of Manipulative Quotations and Transactions

A member may not publish or circulate any communication purporting to report a transaction unless the trade was bona fide. A member may not publish a bid or offer unless it reasonably believes the bid/offer is bona fide.

The standard prohibits:

• Fictitious quoting: posting quotes with no intent to trade
• Spoofing: entering orders to create the false appearance of demand, then canceling
• Layering: placing multiple orders on one side of the market to push prices, then trading on the other side
• Self-trades: buying and selling the same security in matched orders to create false volume

Members must have written policies and procedures to prevent self-trades between related algorithms or trading desks at the same firm.

Exam Tip: Gotchas

• The publication-of-transactions standard prohibits any quote the member does not reasonably believe is bona fide. Stub quotes, spoofed orders, and layered orders all fail this test even if the member never executes.
• Self-trades between affiliated algorithms or desks are a manipulation violation. The firm must have controls to prevent algorithms at the same firm from trading against each other.

Offers at Stated Prices (the Fair-Offers Obligation)

A member that publishes a quote or offer must be willing to trade at that quoted price in at least the minimum size required. A refusal to trade at the quoted price is backing away.

The classic backing-away violation: a market maker posts a $10.00 / $10.05 quote, a customer hits the offer at $10.05, and the market maker refuses or delays execution citing "stale quote" without proper procedure.

Exam Tip: Gotchas

• The fair-offers obligation prohibits backing away from a published quote. A market maker who refuses to trade at its quoted price has violated the standard, even if the quote was already in the process of being updated.
• Backing away applies to BOTH the bid and the offer. A market maker who refuses to buy at its bid is equally in violation.

Anti-Intimidation and Anti-Coordination

Members may not:

• Coordinate prices, quotations, trades, or trade reports with another member
• Threaten or intimidate another member or persons associated with a member, in connection with trading or quoting

The rule targets price-fixing, agreed-upon-spread practices, and intimidation tactics that prevent competitive quoting.

Exam Tip: Gotchas

• The anti-coordination rule prohibits ANY coordination of prices or quotes between members, not just explicit price-fixing. Implicit understandings or "follow the leader" patterns can be violations if proven.

Payments for Market Making

Covered in detail in the Market Making section. Briefly: an issuer (or promoter or affiliate) may not pay a broker-dealer, directly or indirectly, for publishing a quotation, acting as a market maker, or submitting an application in connection with such activities. Permitted exceptions are limited to bona fide registered-offering compensation, reimbursement of regulatory fees, and payment for non-market-making services.

Trading During a Halt

Covered in detail in the LULD and Circuit Breakers section. Briefly: during a trading halt, members may not publish quotations, indications of interest, or transactions in the halted security. The prohibition applies whether the halt is SRO-imposed or FINRA-imposed.

Front Running of Block Transactions

A member with material, non-public information about an imminent block transaction may not trade in:

• The security itself
• Related financial instruments (options on the security, related ETFs, sector indices)
• Underlying securities (if the block is in a derivative)

before the block transaction is publicly disclosed.

The rule applies to:

• Customer block orders the firm is handling for a customer
• Third-party block orders the firm has learned about from other channels (e.g., a counterparty leak)

The information barrier between the trading desk and the block-handling desk is the primary control. A firm that lets a proprietary trader trade ahead of a customer block has violated the front-running rule even if the trader did not know the customer's identity.

Exam Tip: Gotchas

• The front-running rule covers the security AND related instruments AND underlying securities. A firm cannot avoid the prohibition by trading the option instead of the stock.
• The rule applies to BOTH customer block orders the firm handles AND third-party block orders the firm learns about. Either source of MNPI triggers the prohibition.

Trading Ahead of Research Reports

A member may not establish, increase, decrease, or liquidate an inventory position based on non-public advance knowledge of the content or timing of a research report.

The rule targets the trading-vs-research conflict: a firm's traders, knowing the firm is about to publish a "buy" recommendation, could front-run the report by accumulating inventory. Information barriers between research and trading desks are the primary control.

Exam Tip: Gotchas

• The trading-ahead-of-research rule covers BOTH the content AND the timing of a research report. A trader who knows only that a report is imminent (not the recommendation) is still prohibited from trading on that knowledge.
• The information barrier is the structural control, not just policy language. A firm without physical or technological barriers between research and trading is vulnerable to violations.

Order Entry and Execution Practices (Disruptive-Quoting Standard)

Members must prevent prohibited disruptive activity and maintain reasonable supervision tailored to their trading risks. Useful surveillance concepts include:

• Layering: placing multiple orders on one side to push prices, then trading on the other side
• Spoofing: entering orders with no intent to execute, to create false impression of demand
• Momentum ignition: initiating a series of orders to trigger algorithmic followers
• Pinging: entering small orders to detect hidden liquidity

Pinging alone is not necessarily manipulative. Evaluate order bona fides, intent, and the actual trading pattern. The rule defines prohibited conduct; it does not make these four labels a universal mandatory checklist.

Exam Tip: Gotchas

• The disruptive-quoting standard overlaps with the publication-of-transactions standard but focuses on the firm's CONTROLS, not just the conduct itself. A firm without policies to prevent layering and spoofing has violated the standard even if no trader has actually engaged in the conduct.

Trading Ahead of Customer Orders (the Manning Rule)

A member that accepts and holds an unfilled customer order in an equity security may NOT trade for its own account on the same side at a price that would satisfy the customer order, unless it immediately executes the customer order at the same or better price.

The rule is named after the Manning case that established the doctrine in the early 1990s.

Manning Exceptions

Exam Tip: Gotchas

• The Manning rule prohibits trading ahead of an UNFILLED customer order at a price that would satisfy that order. Trading at a price that would NOT satisfy the customer order (e.g., trading on the other side, or at a different price level) is permitted.
• A firm trade ahead of a held customer market order is per se unfair under Manning unless an exception applies. Exceptions require specific structural safeguards (information barriers, large-order negative consent), not just a casual "I didn't know."

Adjustment of Open Orders

GTC limit orders, stop orders, and stop-limit orders must be adjusted for:

• Cash dividends
• Stock dividends and splits
• Rights and warrants distributions

unless the customer marked the order:

A buy limit and sell stop are adjusted down for a cash dividend (because the stock typically trades down by the dividend amount on ex-date). A sell limit and buy stop are NOT adjusted for cash dividends (the customer's risk position does not require adjustment).

Under the FINRA adjustment provision, open sell limits and buy stops are also excluded from the ordinary stock-dividend and forward-split adjustments. Applicable exchange rules may differ. Reverse splits require cancellation, and a forward split affecting an otherwise unadjusted order requires prompt customer notice. Do not treat a do-not-increase instruction as preventing a price adjustment.

Memory Aid: Buy limit and Sell stop = adjust DOWN ("BLISS" doesn't apply; remember: orders BELOW market adjust). Sell limit and buy stop are above market: don't adjust for cash dividends.

Exam Tip: Gotchas

• DNR prevents the adjustment of the LIMIT PRICE for cash dividends; DNI prevents the adjustment of SHARE QUANTITY for splits. Different markings prevent different adjustments.
• Only orders BELOW the market (buy limit, sell stop) are adjusted DOWN for cash dividends by default. Orders ABOVE the market (sell limit, buy stop) are not adjusted for cash dividends, regardless of DNR.

Pre-Time Stamping

Members may NOT pre-time-stamp order tickets. The time of receipt must reflect when the order was actually received from the customer, not when the firm wishes the order had been received.

Pre-time-stamping is a manipulation that lets a firm appear to have received an order at a more favorable time (e.g., timestamping a customer order to appear before a market-moving news release). The rule treats the timestamp as a hard fact: the moment the customer order was received.

Exam Tip: Gotchas

• Pre-time-stamping is per se a violation, even if the firm believes the timestamp is fair. The time of receipt is when the customer's order arrived; the firm cannot edit it.
• Recording after receipt does not permit a false receipt time. Preserve the actual receipt event separately from routing or later record entry. Errors require an appropriate correction trail, not unrecorded backdating or forward-dating.

OTC Quotation Initiation

Before initiating or resuming a quotation in a non-exchange-listed (OTC) equity security, the member must have current issuer information publicly available. The information requirements are filed via Form 211 with FINRA.

Exam Tip: Gotchas

• The piggyback exception requires that the security has been quoted with no gap of more than four business days in succession. The older "12 of 30 calendar days" test no longer applies.
• Shell company piggyback is capped at 18 months. A shell company quotation cannot be piggybacked indefinitely; the relief sunsets.

Insider Trading and the Pre-Adopted Trading Plan Defense

Trading on the basis of material, non-public information (MNPI) violates the antifraud provisions of the Exchange Act. The prohibition applies to any person who trades while in possession of MNPI obtained through a duty of trust or confidence.

A qualifying trading plan can provide an affirmative defense for trades made under it. It must be adopted before awareness of material nonpublic information, operated in good faith, and satisfy the execution and other applicable conditions. Later receipt of information does not alone invalidate an otherwise compliant plan.

An extra, discretionary sale outside the plan cannot use the plan's defense. That does not make the sale an insider-trading violation by itself; liability depends on the insider's awareness of material nonpublic information and breach of a duty of trust or confidence.

For officers and directors, the cooling-off period is the later of 90 days after adoption or two business days after the prescribed financial-results disclosure for the adoption quarter, capped at 120 days after adoption. Other persons who are neither the issuer nor its officers or directors have a 30-day period. This provision imposes no issuer cooling-off period. Amount, price, or timing changes constitute new adoption.

Exam Tip: Gotchas

• Pre-adopted trading plans must be adopted while NOT in possession of MNPI, in good faith, and not as part of a scheme to evade insider trading laws. A plan adopted while the insider already knows of pending MNPI does not provide a defense.
• The affirmative defense protects trades made under the plan, not an off-plan sale. For the separate sale, check whether the insider had material nonpublic information; going off-plan alone does not establish insider trading.

How These Rules Stack on a Single Fact Pattern

The exam loves to give a single fact pattern that violates multiple prohibited-trading rules:

Example fact pattern: A trader at Firm X learns the firm's research department is about to publish a "buy" recommendation on XYZ. Knowing this, the trader (a) buys XYZ in the proprietary book, (b) places a large bid in front of an unfilled customer buy order in XYZ, and (c) at the time of order entry, the trader's tickets are timestamped 30 minutes earlier than actual receipt.

This single pattern violates:

• Trading ahead of research: trading on advance knowledge of a research report
• Manning rule: trading ahead of a customer order
• Pre-time-stamping prohibition: false timestamps
• Potentially the publication-of-transactions and disruptive-quoting standards: manipulative trading practices
• Potentially the insider-trading prohibition: trading on MNPI

Exam Tip: Gotchas

• The Manning rule protects the customer's PRICE PRIORITY; the front-running rule protects the customer's BLOCK CONFIDENTIALITY; the trading-ahead-of-research rule protects against trading on RESEARCH-CONTENT advance knowledge. The exam will give a fact pattern and ask which prohibition was violated. Match the conduct to the protected interest.
• A single fact pattern can violate multiple prohibited-trading rules simultaneously. The exam tests overlapping violations as "select all that apply" or as fact patterns where the supervisor must identify each rule implicated.

What Should You Check on Exam Day?

• Can you distinguish the Manning rule, trading ahead of a customer order, from front-running, trading ahead of a block transaction?
• Do you know what DNR and DNI markings prevent, and that only orders below the market are adjusted for cash dividends?
• Can you state the piggyback exception's four-business-day gap rule and the 18-month cap for shell company quotations?
• Can you distinguish officer/director cooling-off timing from the 30-day period for other nonissuer persons?