Quick Answer
A member may not move an inventory position on non-public advance knowledge of a research report. Neither a member nor an associated person may front run an imminent block, coordinate or intimidate, or split orders primarily to maximize amounts they receive from executing them. The manipulation statute conditionally bars wash sales, matched orders, price-moving series, touting and pegging.
Who is bound, what conduct is named, and which condition switches each prohibition off.
Which One-Liners Win Points?
- Trading ahead of research: a member may not establish, increase, decrease or liquidate an inventory position in a security or its derivative based on non-public advance knowledge of a research report's content or timing.
- Front running: a member or associated person may not cause an order in a security or related financial instrument to be executed while holding material, non-public market information about an imminent block in the security, a related financial instrument, or an underlying security, until the information is public or stale or obsolete.
- Accounts reached: any account the member or associated person has an interest in or discretion over, and a customer or affiliate account only if the firm or an associated person gave it the information.
- Permitted around a block: transactions the member can demonstrate are unrelated to the information; facilitating the customer block order, which, where the trading could affect the market for the security, needs the customer's consent, minimized harm and no firm interest ahead of the customer's; or trading under an exchange's marketplace rules with at least one leg on that exchange.
- Duty of trust or confidence arises, among others, from an agreement to keep information confidential, a history of sharing confidences such that the recipient knows or reasonably should know confidentiality is expected, or information from a spouse, parent, child or sibling. Only the family branch can be rebutted.
- Wash sale versus matched order: no change in beneficial ownership, versus an order entered knowing a contra order of substantially the same size, time and price has been or will be entered. Both need the purpose of a false or misleading appearance of active trading, or with respect to the market for the security.
- Disruptive quoting and trading (spoofing): Type 1 layers displayed orders on one side, executes on the other, then cancels the displayed orders; Type 2 narrows the spread inside the national best bid and offer, then trades against whoever joined it. Both are frequent patterns.
- Payments for publicity: no member may give anything of value to influence or reward publication in public media that has, or is intended to have, a market price effect, unless it is clearly distinguishable paid advertising, discloses the receipt and the amount, or is a research report.
Which Numbers Matter Most?
| Item | Value |
|---|---|
| Equity block benchmark | 10,000 shares or more is generally a block; a smaller trade could be one |
| Research report exclusion | Distributed to fewer than 15 persons |
Which Gotchas Trip Students Up?
- Check the actor. The research rule binds the member alone; front running, anti-intimidation and order splitting bind the member and the associated person; the general antifraud rule binds any person.
- Timing alone is advance knowledge: knowing only the publication date is enough.
- A partial print does not make a block public, and neither does telling a client.
- One unintentional self-trade is generally bona fide. Procedures must be reasonably designed to prevent a pattern or practice from one or related algorithms or desks.
- Anti-intimidation reaches a mere request to alter a price, and its seven preserved freedoms apply only where the conduct is otherwise lawful.
- Splitting an execution for reporting counts as squarely as splitting an order, on intent or effect, and the primary purpose of maximizing the payment is still required.
- Insider trading procedures need no trade to be breached: a firm without written, enforced ones is already exposed.
One-Breath Recap
A member may not move an inventory position on non-public advance knowledge of a report's content or timing, and needs a reasonably designed research-trading information barrier. A member or associated person may not cause an order to execute for accounts it has an interest in or discretion over, or customer or affiliate accounts tipped from inside the firm, while holding material, non-public market information about an imminent block until public, stale or obsolete, coordinate prices, intimidate others, or split orders or executions primarily to maximize amounts it receives from them. Outside exempted securities, the manipulation statute bars wash sales and matched orders aimed at a false or misleading appearance of active trading or the market, price-moving series to induce others to trade, and pegging contrary to Commission rules.
Need more than the recap? Read the full Identifying and Avoiding Prohibited Activities unit.