CME-1 Market Integrity & Insider Trading 2 — Questions and Answers
Question 1: What is 'wash trading' and why is it prohibited?
- Cleaning broker accounts annually
- Simultaneously buying and selling the same security to create artificial volume, misleading the market (Correct answer)
- Trading in foreign currencies
- Settling trades through clearing
Correct answer: Simultaneously buying and selling the same security to create artificial volume, misleading the market
Wash trading creates the false impression of market activity by buying and selling the same instrument without genuine change of ownership, artificially inflating volume figures.
Question 2: What is a 'spoofing' violation in securities markets?
- Impersonating a licensed broker
- Placing large orders with the intent to cancel before execution to create a false impression of demand or supply (Correct answer)
- Trading through a nominee
- Publishing false research
Correct answer: Placing large orders with the intent to cancel before execution to create a false impression of demand or supply
Spoofing involves placing orders without genuine intent to execute them, aiming to manipulate price or mislead other traders about true market supply and demand.
Question 3: Under CMA Market Conduct Regulations, what is 'market manipulation'?
- Executing large block trades
- Any act intended to create artificial prices or false impressions of market activity, including wash trades and spoofing (Correct answer)
- Publishing analyst buy recommendations
- Placing limit orders
Correct answer: Any act intended to create artificial prices or false impressions of market activity, including wash trades and spoofing
Market manipulation encompasses all conduct — trades, orders, or communications — designed to mislead the market about prices, volume, or supply/demand conditions.
Question 4: What obligation does a CMA-licensed research analyst have regarding personal trading in covered securities?
- No restrictions apply
- Must comply with restricted period rules and disclose personal holdings to prevent conflicts of interest (Correct answer)
- Must never hold any securities
- May trade freely if disclosed to employer only
Correct answer: Must comply with restricted period rules and disclose personal holdings to prevent conflicts of interest
Research analysts must observe blackout periods around report publication, disclose personal holdings in covered companies, and manage conflicts of interest in their recommendations.
Question 5: What is the purpose of the CMA's 'Market Conduct Regulations'?
- Setting IPO pricing rules
- Prohibiting and penalising market manipulation, insider trading, and other abusive conduct that undermines market integrity (Correct answer)
- Establishing capital requirements
- Regulating foreign listings only
Correct answer: Prohibiting and penalising market manipulation, insider trading, and other abusive conduct that undermines market integrity
Market Conduct Regulations define and prohibit conduct that undermines the fairness and integrity of the capital market, including manipulation, insider trading, and false information.
Question 6: What must a listed company do when it becomes aware that inside information has been leaked to the market?
- Wait for the next quarterly report
- Make immediate public disclosure to ensure all market participants receive the information simultaneously (Correct answer)
- Contact only major shareholders
- Report to SAMA only
Correct answer: Make immediate public disclosure to ensure all market participants receive the information simultaneously
If MNPI is inadvertently leaked, the company must immediately issue a public announcement to level the playing field and restore market integrity.
CME-1 Market Integrity & Insider Trading 2
What is 'wash trading' and why is it prohibited?