FTT Securities & Futures Regulations 3 — Questions and Answers
Question 1: What is 'market manipulation' under the SFA?
- Creating a false or misleading appearance of active trading or price of a security (Correct answer)
- Conducting large volume trades during market opening
- Placing orders through multiple brokers simultaneously
- Buying and selling securities in the same account on different days
Correct answer: Creating a false or misleading appearance of active trading or price of a security
Market manipulation under the SFA involves creating a false or misleading appearance of active trading in, or the price of, a security. This includes wash trades, painting the tape, and other deceptive practices.
Question 2: 'Insider trading' under the SFA is committed when a person:
- Trades securities while in possession of material non-public information (Correct answer)
- Trades securities using publicly available research reports
- Buys securities ahead of a public announcement they read in the news
- Sells securities at a loss to offset gains
Correct answer: Trades securities while in possession of material non-public information
Insider trading occurs when a person trades securities while connected to a corporation and in possession of material non-public information about that corporation.
Question 3: Which of the following is an example of 'false trading' under the SFA?
- Conducting wash sales to create an appearance of active trading (Correct answer)
- Purchasing shares based on a broker's research report
- Selling shares after reading a company's annual report
- Hedging a long position with futures contracts
Correct answer: Conducting wash sales to create an appearance of active trading
False trading includes wash sales — buying and selling the same security between related parties — to create a misleading appearance of active trading without any genuine change in beneficial ownership.
Question 4: The SFA prohibits 'front running'. This means:
- Trading ahead of a client's pending order to benefit from the anticipated price movement (Correct answer)
- Running a trading algorithm faster than competitors
- Being first to execute a trade when markets open
- Submitting orders before receiving client confirmation
Correct answer: Trading ahead of a client's pending order to benefit from the anticipated price movement
Front running is the prohibited practice of a broker or adviser trading in their own account ahead of a client's pending order, knowing the client's order will likely move the price in a predictable direction.
Question 5: Under the SFA, 'short selling' disclosure requirements apply when:
- A person sells securities they do not own or have not borrowed (Correct answer)
- A person sells securities they own at a loss
- A person sells more than 5% of their portfolio in a day
- A person uses leverage to sell securities
Correct answer: A person sells securities they do not own or have not borrowed
Short selling — selling securities not owned or not yet borrowed — is subject to disclosure requirements under the SFA. Sellers must indicate whether a sale is a short sale when placing the order.
Question 6: Which conduct rule prohibits a CMS licence holder from 'churning' a client's account?
- The rule against excessive trading for the purpose of generating commissions (Correct answer)
- The rule against insider trading
- The prohibition on short selling
- The market manipulation rule
Correct answer: The rule against excessive trading for the purpose of generating commissions
Churning is the prohibited practice of excessively trading a client's account primarily to generate commissions for the broker, rather than to benefit the client. It violates conduct rules requiring CMS holders to act in clients' best interests.
FTT Securities & Futures Regulations 3
What is 'market manipulation' under the SFA?