Financial Dictionary Market Abuse and Insider Trading

Churning is an abusive sales practice occuring when a broker exercising control over a client's investment account engages in excessive or unnecessary trading. These trades cost the client additional commissions and other costs, thus increasing the profits of the trader.

Front Running is another abusive practice by which a broker uses his advance knowledge of a client's impending trade to earn extra money for his own account. Bacause a large order will predictably cause a change in the prevailing market price of a security, a front running trader who knows that his client will shortly purchase a large block of stock can enter his own smaller buy order to push up prices, then close out his own position for a quick profit - to the cost of his client.

Insider trading is the practice by which corporate insiders. i.e. those having access to non-public information about a corporation with publicly traded securities, use this confidential knowledge to trade in that company's securities.
Insiders include primary insider, i.e. those persons

• possessing an ownership stake an a company or a related firm, or
• whose position in the company affords them privileged access to confidential information about the firm (e.g. board members, etc.). or
• who, while not owners or employees of a company, acquire confidential information about the company in the cource of business (e.g. lawyers, tax advisirs, etc.), or
• who illegally acquired inside information,

as well as secondary insiders, i.e. all other possessing inside information about a firm.

The purchase or sales of financial instruments at the close of trading in order to influence the day's closing price and thus mislead market participants making trades on the basis of that price.

Market manipulation is a blanket term describing attempts to interfere with the free operation of the market and create false or misleading impressions of the market or price for a given security.  

Tthe following activities all constitute illegal market manipulation:

• Publishing false or misleading information about events or conditions which could influence the price of a security or materially affect its valuation;
• Suppression or concealment of information having the potential to affect the price of a security;
• Carrying out deals or purchase or sales orders to generate false or misleading signals about the supply, demand, or exchange or market price of a security, or lead to an artificial market price level; and
• Engaging in deceitful or fraudulent acts that have the potential to affect the price of a security.

The regulations also apply to trading in goods and foreign currency, including disbursements, money orders, and checks. However, actions taken by a market participant for legitimate purposes and done in accordance with the general practice in the market concerned do not constitute market manipulation.

The purchase and sale of the same security by an individual or organized group of individuals, with the intention of falsely giving the impression of unusual trading activity in the security. Matching orders is intended to get other investors interested in a particular security, but is illegal.

See front running, with the difference that, in parallel running, the broker's personal securities oder is placed at the same time as the transaction carried out at the request of the client.

Parking is the practice of selling securities subject to an agreement or understanding that they will be repurchased by the seller within a certain amount of time (such as 20 days) at the same price and in the same quantity, or with a predefined tolerance with regard to price or quantity; this is known as simple parking.  In complex parking, the sale and repurchase of the securities is carried out in a series of smaller transactions over a certain span of time, rather than all at once.

Single or cumulative orders that are canceled or never executed, but comprise a large percentage of total daily orders (indicator of "painting the tape").

In this scam, owners of a security – usually small-cap, thinly-traded stocks for which there exists a limited market – attempt to artificially inflate demand by releasing false or misleading positive statements about the stock (“pumping“).  Once other investors misled by the information enter the market, the original owners sell their holdings (“dumping“), cease promoting the stock, and the price collapses.

The systematic examination of order books for market orders on exchange-listed securities for which no offer or bid prices currently exist.  The intention is to provide offer or bid prices that diverge significantly from the fair market price in order to execute transactions at very favorable rates.

Trash & cash is a variety of securities fraud in which a trader sells his position in a given firm’s securities, then spreads negative information about the firm, causing the prices of those securities to decline.  The trader can then buy the securities back and make a profit.

A wash sale occurs when a market participant sells a security at a loss, then repurchases the same or substantially identical security shortly thereafter in order to realize a loss for tax purposes.  Such losses offset capital gains realized in the same period, thus reducing the seller’s tax burden.  The seller than immediately repurchases the security, expecting it to increase in value.

Wash trades are transactions in which the beneficial ownership of the shares traded does not change, despite attempts to convince others that it has.  This is usually accomplished through a series of transactions intended to make other market participants believe that a security has traded hands, though the actual beneficial owner has not.