Ethical and Professional Standards
Reading 3. Guidance for Standards I-VII
Learning Outcome Statements
a. demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity;
b. distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards;
c. recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.
CFA Curriculum, 2020, Volume 1
Subject 6. Standard II (B) Market Manipulation
B. Market Manipulation.
Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.
Market manipulation is a deliberate attempt to interfere with the free and fair operation of the market. It includes practices that distort security prices or trading volume with the intent to deceive people or entities that rely on information in the market.
Market manipulation examples include:
- Price manipulation. Placing buy or sell orders (or both) into the trading system in order to change or maintain the price of a stock. The motives for attempting to do this vary: to increase the value of a position in the market for finance or accounting purposes, to be able to issue new shares at a higher price or to cause such a price rise that other investors are attracted to the stock, creating demand that the manipulator can sell into (called "pump and dump").
- Marking the close or ramping. Making a purchase or sale of a security near the close of the day's trading, with the objective of affecting published prices, particularly the reported closing price. This might be done to avoid margin calls (when the trader's position is not self-financed) to support a flagging price or to affect the valuation of a portfolio (called "window dressing"). A common indicator is trading in small parcels of the security just before the market closes.
- Wash trades and pre-arranged trading. A wash trade is a trade in which there is no change in the beneficial ownership of the securities - the buyer is, in reality, also the seller. A pre-arranged trade involves two parties trading on the basis that the transaction will be reversed later, or with an arrangement that removes the risk of ownership from the buyer. "Pooling or churning" can involve wash sales or pre-arranged trades executed in order to give an impression of active trading, and therefore investor interest, in the stock.
- False or misleading information. Companies can be tempted to re-release information or present information in an over-optimistic manner, in order to generate interest in the company's securities or help a flagging market. In some cases this includes unrealistic, unsubstantiated, or incorrect data, projections or evaluations. When the perpetrators use the demand generated by the false information they have spread to sell their own shares, the operation is known as "hype and dump."
- Capping and pegging. This involves activity on both the stock market and the derivatives market. A trader writes an option, which obliges the trader to sell to (in the case of a call option) or buy from (in the case of a put option) the option holder a specified number of shares at a specified price. The trader then trades in the shares covered by the option in order to affect the share price in a direction that will make the option unprofitable to exercise.
The intent of the action is critical to determining whether it is a violation of this standard. The standard does not prohibit legitimate trading strategies that exploit a difference in market power, information, or other market inefficiencies. It also does not prohibit transactions done for tax purposes (e.g., selling and immediately buying back a particular stock).
User Contributed Comments 8You need to log in first to add your comment.
Presenting false and misleading information is a violation of I(C) also.
How can ramping , capping & pegging be differentiated from legitimate trading?
that's too technical, 81618, and won't be in the exam.
False and Misleading Info. Violation of I(C), but this the company re-releasing or hyping information, not a member of the CFA. Just a point of interest in the case.
to addidas- I think the last paragraph explains and provides an answer to your question. Its all about the intent of the trader.
to sumerdumer: only a CFA candidate/member can violate a CFA standard, thus when a questions asks if an action violates a CFA standard, the implicit assumption exists that the party involved is a CFA candidate/member
unload the dump
Pegging has a different meaning nowadays according to urban dictionary...