{"id":852,"date":"2019-07-12T17:36:00","date_gmt":"2019-07-12T17:36:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=852"},"modified":"2025-05-09T06:12:58","modified_gmt":"2025-05-09T06:12:58","slug":"standard-2b-market-manipulation","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/ethical-and-professional-standards\/standard-2b-market-manipulation\/","title":{"rendered":"Standard II(B) \u2013 Market Manipulation"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Standard II \u2013 Integrity of Capital Markets (2025 Level I CFA\u00ae Exam \u2013 Ethics \u2013 Module 3)\",\n  \"description\": \"This video lesson covers CFA Level 1 Ethics and Professional Standards, focusing on Standard II: Integrity of Capital Markets. It explains material non-public information, Mosaic Theory, social media considerations, and market manipulation practices. The lesson also includes examples, exam tips, and guidance on identifying ethical and unethical conduct.\",\n  \"uploadDate\": \"2022-08-23T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/i.ytimg.com\/vi\/6SD8qMigWp8\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=6SD8qMigWp8\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/6SD8qMigWp8\",\n  \"duration\": \"PT22M28S\"\n}\n<\/script>\n\n\n\n<p>[vsw id=&#8221;6SD8qMigWp8&#8243; source=&#8221;youtube&#8221; width=&#8221;611&#8243; height=&#8221;344&#8243; autoplay=&#8221;no&#8221;]<\/p>\n<p>Standard II(B) \u2013 Market Manipulation dictates that members refrain from any activity that will fraudulently manipulate volumes of trading and\/or causes a distortion of securities pricing.<\/p>\n<h2>Compliance<\/h2>\n<p>Two key attributes of market manipulation are information-based and transaction-based.<\/p>\n<p>Information-based manipulation involves the distribution of false or misleading information as a means of distorting volume trading and market price valuation. An example of the distribution of misleading information is the over-inflation of the projected value for a security, only to sell off the majority of holdings once the market price achieves an artificially high level. The common term for this practice is \u201cpump and dump.\u201d<\/p>\n<p>Related to information-based manipulations, social media networks are a particularly viable target for such practices.\u00a0 The anonymity of those providing misinformation and the availability of amateur traders make this channel type an often preferred medium for market manipulation. Logging on to chat rooms to share inflated information about a holding to generate excitement for that security can be construed as market manipulation.<\/p>\n<p>Transaction-based manipulations include making trades that would trigger a falsification in price-setting mechanisms, thereby misleading market participants. In addition, any transaction that artificially gives the impression that there is a movement within a financial instrument beyond expected market activity is subject to review for manipulation.<\/p>\n<p>A firm can bolster its compliance with Standard II(B) \u2013 Market Manipulation by taking added precautions before making recommendations.\u00a0 Smaller firms, for example, are more easily manipulated based upon lighter trading and low liquidity.\u00a0 Therefore, prudence in releasing public information is critical.\u00a0 Additionally, healthy cynicism related to third-party research reports or press releases that make extreme marketing claims is advised. Finally, as a reminder, all research must include a disclaimer as required by the SEC.<\/p>\n<h2>Violation<\/h2>\n<p>The key to violation is the intent to deceive parties who depend upon accurate market information. For example, knowingly using inaccurate reporting under the guise of analysis would be an abuse of Standard II(B) \u2013 Market Manipulation.<\/p>\n<blockquote>\n<h2>Question<\/h2>\n<p>James Murrow, CFA, would like to make a large purchase of Smith Corporation.\u00a0 He is concerned, though, that due to infrequent trading of Smith Corp., buying a large volume of the company would result in an immediate price jump of the stock.\u00a0 To this end, Murrow wants to know if this is a violation of Standard II(B) \u2013 Market Manipulation.<\/p>\n<p>You would indicate to James Murrow that:<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">He would violate Standard II(B) \u2013 Market Manipulation via transaction-based manipulation.<\/li>\n<li data-tadv-p=\"keep\">He would violate Standard II(B) \u2013 Market Manipulation through information-based manipulation.<\/li>\n<li data-tadv-p=\"keep\">No violation would occur.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is C.<\/p>\n<p>Murrow would commit no violation by purchasing stock in Smith Corporation.\u00a0 He would not intentionally distort prices through fraud or deceit.\u00a0 The overall lack of trading on Smith Corporation is not within his control.\u00a0 Therefore, a price jump based on Murrow\u2019s purchase is a natural reaction of an otherwise ethically traded security.<\/p><\/blockquote>","protected":false},"excerpt":{"rendered":"<p>[vsw id=&#8221;6SD8qMigWp8&#8243; source=&#8221;youtube&#8221; width=&#8221;611&#8243; height=&#8221;344&#8243; autoplay=&#8221;no&#8221;] Standard II(B) \u2013 Market Manipulation dictates that members refrain from any activity that will fraudulently manipulate volumes of trading and\/or causes a distortion of securities pricing. Compliance Two key attributes of market manipulation are&#8230;<\/p>\n","protected":false},"author":18,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[3],"tags":[],"class_list":["post-852","post","type-post","status-publish","format-standard","hentry","category-ethical-and-professional-standards","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Market Manipulation Example | CFA Level 1 - AnalystPrep<\/title>\n<meta name=\"description\" content=\"Standard II(B) prohibits fraudulent actions that distort trading volume or securities pricing. 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