Standard II (B) – Market Manipulation

Standard II (B) – Market Manipulation

Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants. 


Members are required to comply with Standard II(B) – Market Manipulation to promote the integrity of capital markets. Market manipulation comprises actions that alter trading volumes or stock prices. Market manipulation may lead to a decrease in market participation (due to a loss in investor confidence), inefficient allocation, and a decline in the economic growth of a country.

Information-Based Manipulation

 Members and Candidates should desist from sharing information with the intention of artificially “pumping” up the price of an investment to then later “dump” (sell) it at a higher price.

Transaction-Based Manipulation

Transaction manipulation occurs in cases where a member or candidate knows or should have known that their actions could potentially affect the price of an investment.

Transaction manipulation includes, but is not limited(1) to:

  • Transactions that artificially affect prices or volume to give the impression of activity or price movement in a financial instrument, which represent a diversion from the expectations of a fair and efficient market.
  • Securing a controlling, dominant position in a financial instrument to exploit and manipulate the price of a related derivative and/or the underlying asset.

(1) The list is taken verbatim from the CFA Program curriculum.

Application 1: Pump and Dump Strategy

Jacob Stevens has significant equity holdings in Axoline Corporation. He posts false rumors about Axoline’s acquisition of a competing firm on various online forums, in an attempt to pump up the price of the stock. Steven’s attempt to pump up Axoline’s stock price is unsuccessful, and the stock price stays within its trading range.

Would Steven’s unsuccessful attempt at pumping up Axoline’s stock price violate Standard II(B) – Market Manipulation?

      A. No, because he failed to affect the stock price.

      B. Yes, regardless of the outcome on the price, he intended to mislead market participants.

      C. No, Steven is allowed to give his opinion on Axoline’s future corporate actions.


The correct answer is B. 

Stevens has violated Standard II(B) – Market Manipulation. The outcome of Steven’s attempt at pumping up the stock is irrelevant. According to Standard II(B) – Market Manipulation, the intent of his actions would be the only consideration.

Application 2: Manipulation of Model Inputs

Andy Knoxville is the head of structured products at Kings Investment Bank. As the leader of the structured products team, he is responsible for the creation of new and creative products that could attract potential investors. He notices that there is substantial interest in low volatility products. Consequently, Knoxville creates “low-vol” products that contain inputs that are intended to suppress the negative impact of higher volatility in the market. A part of Steven’s compensation is directly linked to the number of clients that purchase these “low-vol” products. In periods of low volatility, clients that bought these products were extremely successful. Since the beginning of the coronavirus epidemic, high levels of volatility have led to numerous defaults.

Has Knoxville violated Standard II(B) – Market Manipulation?

       A. No, clients should be aware of the complexity of the “low-vol” structured product.

       B. No, he did not artificially manipulate the price, volume, or volatility of any stock.

       C. Yes, intentionally manipulated the inputs of the model to conceal the effects of higher volatility on the returns of the product.


The correct answer is C. 

Steven violated Standard II(B) – Market Manipulation. Intentionally manipulating model inputs is considered a form of information-based manipulation. Steven’s manipulation was intended to attract more business and increase his compensation. His actions would cause investors to lose trust in capital markets and reflects poorly on the investment profession. 

Application 3: Pump-Primping Strategy

John Reynolds, CFA and CEO of Naxis Future Exchange (NFE), is introducing a new equity index futures contract into the market. In an attempt to attract individuals and major brokers to trade on its exchange, Naxis offers significant discounts on its trading fees. To be eligible for the reduction in trading fees, firms must agree to a minimum trading volume of the new contract over the next six months. Naxis hopes that the demonstration of consistently large liquidity will attract new brokerages and retail traders to its exchange.

Are Reynolds’s actions in conflict with Standard II(B) – Market Manipulation?

      A. No, Reynolds is allowed to offer discounts on trading fees.

      B. No, the firms or retail traders who engage with Reynolds’ exchange on this offer are in violation.

      C. Yes, because Reynolds is attempting to mislead investors about the liquidity of the contract.


The correct answer is C. 

Investors may be misled by the artificial liquidity generated by Naxis through the discounts offered. The expiry of the discount after six months could potentially reduce the liquidity of the contract. Because Reynolds failed to disclose this agreement with all its clients and potential clients, he has violated Standard II(B) – Market Manipulation. Disclosure of the arrangement to all investors would comply with Standard II(B) – Market Manipulation.

Application 4: Information Manipulation

Jeremiah Kane is a performance analyst at Vision Investment Managers. He recently had a confrontation with a senior portfolio manager at the firm. The manager has a strict long-only large-cap investment mandate. In last year’s performance report, Kane notices a style drift and only presents results attributable to the investment mandate.

The manager was frustrated by Kane’s report understating his performance. Kane is frequently harassed by the manager. In frustration, Kane posts false negative information of several “big name” stocks – held in the fund – on popular investor groups. The prices of these stocks fall dramatically.

Has Kane violated Standard II(B) – Market Manipulation?

     A. No, because he does not personally benefit from the manipulation.

     B. Yes, because his actions lead to significant price action.

     C. No, because he is not responsible for the investment actions taken by the investors and subsequent price change.


The correct answer is B. 

Kane does not have to personally benefit from the market manipulation to violate Standard II(B) – Market Manipulation. In sharing false information, he intended to harm the manager’s performance, but his actions misled investors. As a result, he has violated Standard II(B) – Market Manipulation.

Reading 46: Guidance for The Standards of Professional Conduct (I-VII)

LOS 46 (a) Demonstrate a thorough knowledge of the CFA Institute Code of Ethics and Standards of Professional Conduct by applying the Code and Standards to specific situations.

Shop CFA® Exam Prep

Offered by AnalystPrep

Featured Shop FRM® Exam Prep Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Shop Actuarial Exams Prep Shop Graduate Admission Exam Prep

    Daniel Glyn
    Daniel Glyn
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.
    Nyka Smith
    Nyka Smith
    Every concept is very well explained by Nilay Arun. kudos to you man!
    Badr Moubile
    Badr Moubile
    Very helpfull!
    Agustin Olcese
    Agustin Olcese
    Excellent explantions, very clear!
    Jaak Jay
    Jaak Jay
    Awesome content, kudos to Prof.James Frojan
    sindhushree reddy
    sindhushree reddy
    Crisp and short ppt of Frm chapters and great explanation with examples.