SCA Market Surveillance & Manipulation — Questions and Answers
Question 1: What is 'front running' in securities markets?
- Being the first firm to launch a new product
- Trading securities for one's own account before executing a large client order, benefiting from the price movement that the client order will cause (Correct answer)
- Running to execute trades faster than competitors
- Opening the market in the morning
Correct answer: Trading securities for one's own account before executing a large client order, benefiting from the price movement that the client order will cause
Front running is the prohibited practice where a broker or trader executes trades in their own account knowing that a large client order is about to move the market price, allowing them to profit at the client's expense.
Question 2: What is 'wash trading'?
- Cleaning up a trading system's technical errors
- Simultaneous buying and selling of the same security to create an artificial appearance of trading activity without a genuine change in ownership (Correct answer)
- Trading in foreign currency
- Settling trades using cash
Correct answer: Simultaneous buying and selling of the same security to create an artificial appearance of trading activity without a genuine change in ownership
Wash trading involves a party simultaneously buying and selling the same security, creating false impressions of trading volume and activity without any real transfer of ownership. It is a form of market manipulation prohibited by UAE law.
Question 3: What is 'pump and dump' market manipulation?
- A legitimate volatility strategy
- Artificially inflating a stock's price through false statements/hype (pump), then selling at the inflated price (dump), leaving other investors with losses (Correct answer)
- A method of short selling
- A strategy for value investors
Correct answer: Artificially inflating a stock's price through false statements/hype (pump), then selling at the inflated price (dump), leaving other investors with losses
Pump and dump involves artificially inflating a stock's price through misleading or false promotional statements, then selling shares at the inflated price. When the promoters sell, the price collapses, leaving other investors with losses.
Question 4: What is 'spoofing' in financial markets?
- Creating fake broker accounts
- Placing large orders with the intention of canceling them before execution to create a false impression of supply/demand and move prices (Correct answer)
- Sending spam emails to investors
- Hiding the true ownership of shares
Correct answer: Placing large orders with the intention of canceling them before execution to create a false impression of supply/demand and move prices
Spoofing involves placing large buy or sell orders to create a false impression of market demand or supply, then canceling the orders before execution. It manipulates other traders into reacting to false signals.
Question 5: How does the SCA detect market manipulation?
- By relying solely on investor complaints
- Through automated surveillance systems that monitor trading patterns, unusual volume, price movements, and flagged transactions (Correct answer)
- By auditing only the largest brokers annually
- The SCA does not have surveillance capabilities
Correct answer: Through automated surveillance systems that monitor trading patterns, unusual volume, price movements, and flagged transactions
The SCA employs sophisticated market surveillance systems that continuously monitor trading activity for suspicious patterns, unusual volumes, price movements, and relationships between traders — triggering investigations when anomalies are detected.
Question 6: What is 'layering' in market manipulation?
- Structuring a firm in multiple legal entities
- Placing multiple orders at different price levels that are not intended to be executed, to create a false appearance of market depth (Correct answer)
- Diversifying a portfolio across sectors
- Listing a company on multiple exchanges
Correct answer: Placing multiple orders at different price levels that are not intended to be executed, to create a false appearance of market depth
Layering involves placing multiple non-bona fide orders at various price levels to create an illusion of market depth and interest, then canceling them after other traders react. It is a form of spoofing and is prohibited.
SCA Market Surveillance & Manipulation
What is 'front running' in securities markets?