Market Manipulation

Wash trades and matched orders are examples of:

1. A.Permitted market-makingMarket makers take genuine risk by quoting both sides and standing behind their quotes. A wash trade transfers nothing and a matched order pairs a buy with a prearranged sell, so neither involves real risk or a real change of ownership. They produce the appearance of trading without its substance.
2. B.Encouraged liquidity provisionReal liquidity means a willing counterparty an investor can actually trade against. Volume manufactured between coordinated accounts adds no such counterparty; it inflates the tape and misleads everyone reading it about how much genuine interest exists.
3. C.Prohibited market manipulationCorrect - manipulative trading is illegal.
4. D.Legal if disclosedDisclosure to whom? The deception in manipulation is aimed at the whole market, which reads price and volume as evidence of real demand. There is no counterparty who could be told and thereby cure it, so this conduct is prohibited outright rather than conditioned on notice.

Why: These are forms of market manipulation, which is prohibited.

Entering matched orders to create the false appearance of active trading is:

1. A.Legal price supportGenuine stabilization is a regulated activity with rules around it, which lends this some credibility. Matched orders are different in kind: they fabricate trading that never really happened in order to mislead other investors.
2. B.Best executionBest execution concerns getting favorable terms on a real customer order. Matched orders serve no customer purpose at all; they exist only to create a false impression.
3. C.Required for liquidityReal liquidity comes from real buyers and sellers. Manufactured volume only simulates it, deceiving investors who read trading activity as a signal of genuine interest.
4. D.Prohibited market manipulationCorrect - creating false activity is barred.

Why: Matched orders and wash trades are market manipulation and prohibited.