SIE practice questionhardMarket Manipulation
Two traders agree to buy and sell the same stock between themselves to create the appearance of active trading and attract other investors. This illegal practice is called:
- AMatched orders / wash trading✓ Correct answer
- BArbitrage
- CShort selling
- DDollar-cost averaging
Explanation
Why A — Matched orders / wash trading
Matched orders (also called wash trading or painting the tape) involve prearranged trades between two or more parties to create misleading appearance of active trading in a security. The purpose is to artificially inflate volume and attract unsuspecting investors. This is a form of market manipulation prohibited under Section 9(a) of the Securities Exchange Act of 1934. Short selling (B) and arbitrage (C) are legitimate trading strategies. Dollar-cost averaging (D) is an investment technique.
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