Cracked opened the first book today on the subway ride to work, and read something that has had me confused since I read the Standards of Practice Handbook during Level 1. " Candidates/Charterholders must not distort prices or artificially inflate trading volume with intent to mislead market participants" So correct me if I am wrong in stating that it IS ok to distort prices and artificially inflate trading volume if this is disclosed to clients before hand??? I dont get it
The example I remember (from L2) is intentionally creating liquidity during the early days of a fund in order to get it started. If this is discloused to clients then you aren’t manipulating the market. BUT, if you sell the idea of your fund based on the current liquidity (that you are creating), then you are manipulating because your are misleading clients on the true volume of the position.
also, by mkt participants, they don’t necessarily mean just your clients. it’s everyone who is involved in that stock. so you couldn’t disclose it just to your clients and be ok…
agreed with mwvt9. i would still err on the side of not being allowed to manipulate anything… unless the case is pretty clear that the manipulation is for a good reason and very public
The term “manipulation” already pretty much implies an artificial distortion with some nefarious intention. The standards prohibit distorting prices with the intention to mislead. So … YES… it really is OK to distort prices as long as you don’t intend to mislead. The better example is a large block trade in any thinly traded instrument that causes a large rise or fall in the price of the instrument. Such a transaction pretty clearly distorts the market price (this may be debatable, but please don’t (Joey)), but as long as the intention was not to mislead, it’s OK.
For issues related to Mkt manipulation, I try to remember me this sentence from CFAI texts page 45: “The intent of the action is critical to determining whether it is a violation of this standard”