CSCP CSCP Surveillance & Monitoring 1 — Questions and Answers
Question 1: What is the primary purpose of a trade surveillance system in a broker-dealer?
- To maximize trading profits
- To detect potentially manipulative or abusive trading activity (Correct answer)
- To automate order routing
- To reduce settlement times
Correct answer: To detect potentially manipulative or abusive trading activity
Trade surveillance systems are designed to identify patterns that may indicate market manipulation, insider trading, or other regulatory violations.
Question 2: Which regulatory body requires broker-dealers to establish written supervisory procedures (WSPs) for their surveillance programs?
- SEC only
- CFTC only
- FINRA (Correct answer)
- OCC
Correct answer: FINRA
FINRA Rule 3110 requires member firms to establish, maintain, and enforce written supervisory procedures tailored to the nature of the firm's business.
Question 3: What does 'layering' refer to in the context of market surveillance?
- Stacking multiple compliance approvals
- Placing and quickly canceling orders to create a false appearance of market depth (Correct answer)
- Diversifying across asset classes
- Applying multiple regulatory frameworks simultaneously
Correct answer: Placing and quickly canceling orders to create a false appearance of market depth
Layering is a form of market manipulation where a trader places multiple orders and cancels them before execution to create the illusion of supply or demand.
Question 4: Under FINRA Rule 3120, what must a firm's CEO or equivalent certify annually?
- The firm's profitability
- The firm's supervisory control system is reasonably designed to achieve compliance (Correct answer)
- The number of customer complaints
- The firm's net capital ratio
Correct answer: The firm's supervisory control system is reasonably designed to achieve compliance
FINRA Rule 3120 requires annual CEO certification that the firm's supervisory control policies and procedures are reasonably designed to achieve compliance with applicable rules.
Question 5: Which of the following is an example of 'spoofing' under the Dodd-Frank Act?
- Selling securities short without locating shares
- Bidding or offering with intent to cancel before execution to move prices (Correct answer)
- Trading on material non-public information
- Failing to report a suspicious activity
Correct answer: Bidding or offering with intent to cancel before execution to move prices
Spoofing under Dodd-Frank is defined as bidding or offering with intent to cancel the bid or offer before execution, and it is explicitly prohibited.
Question 6: A compliance officer reviewing trading alerts notices a pattern of trades executed just before significant price moves. This most likely warrants investigation for:
- Best execution failures
- Front-running or insider trading (Correct answer)
- Excessive mark-ups
- Churning
Correct answer: Front-running or insider trading
Trades consistently placed just before material price movements suggest possible access to non-public information, triggering insider trading or front-running concerns.
CSCP CSCP Surveillance & Monitoring 1
What is the primary purpose of a trade surveillance system in a broker-dealer?