Manipulative Trading

Regulatory Obligations 

Several FINRA rules prohibit firms from engaging in impermissible trading practices, including manipulative trading—for example, FINRA Rules 2010 (Standards of Commercial Honor and Principles of Trade), 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices), 5210 (Publication of Transactions and Quotations), 5220 (Offers at Stated Prices), 5230 (Payments Involving Publications that Influence the Market Price of a Security), 5240 (Anti-Intimidation/Coordination), 5270 (Front Running of Block Transactions), 5290 (Order Entry and Execution Practices) and 6140 (Other Trading Practices). 

Under FINRA Rule 3110 (Supervision), firms are required to include in their supervisory procedures a process to review securities transactions that is reasonably designed to identify trades that may violate the provisions of the Exchange Act, the rules thereunder, or FINRA rules prohibiting insider trading and manipulative and deceptive devices that are effected for accounts of the firm and its associated persons. The firm must promptly conduct an internal investigation into any such trade to determine whether a violation of those laws or rules has occurred.

Among other obligations, FINRA Rule 5210 prohibits firms from publishing or circulating communications regarding transactions and quotations unless they believe the information is bona fide; FINRA Rule 5270 prohibits trading in a security or related financial instrument that is the subject of an imminent customer block transaction while in possession of material, non-public market information concerning that transaction; and FINRA Rule 6140 contains several requirements to ensure the promptness, accuracy, and completeness of last sale information for National Market System (NMS) stocks and to prevent that information from being publicly trade reported in a fraudulent or manipulative manner.

Findings

  • Inadequate WSPs:
    • Not having procedures reasonably designed—based on the types of business the firm engages in—to identify patterns of manipulative conduct; not identifying specific steps and individuals responsible for monitoring for manipulative conduct; and not outlining escalation processes for detected manipulative conduct.
    • Not tailoring procedures to reasonably supervise differing sources of order flow (e.g., proprietary trades, retail customers, institutional customers, foreign financial institutions).
    • Not considering red flags from external sources (e.g., inquiries from regulators, trading platforms, or other service providers or publicly available information about known manipulators).
  • Surveillance Deficiencies:
    • Not establishing and maintaining a surveillance system reasonably designed to monitor for different types of manipulative trading schemes (e.g., potential layering, spoofing, wash trades, prearranged trades, marking the close, odd-lot manipulation) with parameters that are reasonably designed and documented.
    • Not reasonably designing and establishing surveillance controls and thresholds to capture manipulative trading (e.g., thresholds not designed to capture the appropriate market class of securities or type of securities or include both customer and proprietary trading or thresholds set too low or too high to identify meaningful activity).
    • Failing to periodically evaluate the adequacy of firms’ surveillance controls and thresholds in light of changes in their business, customer base or the market.
    • Not adequately monitoring customer activity for patterns of potential manipulation (e.g., potential prearranged trading across customers), including reviews that do not take into consideration patterns across appropriate lengths of time (e.g., several days) or across different customers, or different alert types (e.g., alerts for marking the close, matched trading, spoofing and layering).
    • Not performing timely reviews of surveillance alerts or exception reports.
    • Not dedicating sufficient resources and training to reviews of surveillance alerts or exception reports.
    • Not documenting alert review findings.

Increase in Small-Cap Fraud Involving Exchange-Listed Equities

In the 2025 FINRA Annual Regulatory Oversight Report and in Regulatory Notice 22-25 (Heightened Threat of Fraud), FINRA reported that certain small-cap, exchange-listed issuers were being targeted for manipulative pump-and-dump schemes in connection with Initial Public Offerings (IPOs). These schemes primarily involved low-priced exchange-listed issuers with operations in foreign jurisdictions, and the IPOs typically offered a low amount of the issuers’ public float for distribution in the IPO.1

In 2024 and 2025, these schemes have continued and evolved:

  • FINRA continues to observe suspected pump-and-dump schemes occurring less frequently at the time of the small-cap issuers’ IPOs, and more frequently months after these IPOs. Oftentimes, the same issuer is subject to multiple suspected pump-and-dump schemes.
  • Suspected nominee accounts continue to be utilized to invest in small-cap IPOs to aid in bringing companies public. The suspected nominee accounts are typically centrally controlled by one or more bad actors that fund the accounts and control the activity in the accounts, sometimes remotely.
  • In advance of the pump-and-dump scheme, nominee accounts may “funnel,” or sell their shares in a coordinated manner to one or more foreign omnibus accounts, that result in the omnibus account(s) holding a significant portion of the public float.
  • Similarly, well after the issuer’s IPO, the issuer may sell a large amount of shares in a privately placed secondary offering to select foreign investors—lacking adequate public disclosure—leading to these investors holding a large amount of the issuer’s public float. The shares are subsequently deposited at U.S. brokerage firms, or at foreign financial institutions that maintain accounts at U.S. brokerage firms.
  • FINRA has also observed a new trend involving the use of account takeover (ATO) fraud to purchase shares of small-cap companies that are the subject of pump-and-dump schemes. After a bad actor accesses the account, the bad actor sells legitimately acquired investments and uses the funds to purchase shares of the subject securities.
  • FINRA has observed a continued increase in the use of text messaging and social media-based scams to attract victims to purchase shares of small-cap issuers subject to pump-and-dump schemes. These include continued use of investment club scams, in which bad actors invite victims into social media-based investment clubs, directing victims on the time and price to buy certain small-cap securities.
  • The victims’ purchases occur in conjunction with—and likely cause—price increases in the targeted securities through the use of coordinated limit orders. These purchases often coincide with liquidations of shares by accounts presumed to be controlled by foreign bad actors, allowing the bad actors to profit from the schemes.

In October 2025, FINRA initiated a targeted examination of firm practices regarding public and private offerings of small-cap exchange-listed issuers with business operations in foreign jurisdictions.

For additional guidance, FINRA recommends these Investor Insights articles:

Also see the Anti-Money Laundering, Fraud and Sanctions topic.

Effective Practices

  • Manipulative Schemes:
    • Tailoring surveillance control parameters and thresholds and processes designed to detect different types of manipulative order entry and trading activity based on product class, including listed and OTC equities, options and fixed income products (e.g., Treasuries).
    • Monitoring for red flags associated with customer accounts that may have a relationship with an issuer, such as:
      • customer accounts (foreign or domestic) referred by a small-cap issuer to the underwriting broker-dealer (particularly when the same officer or CEO has been noted across multiple issuers); and
      • money movements between the issuer and customer accounts.
    • Monitoring for red flags indicating:
      • conflicts of interest in private capital raises in advance of IPOs (particularly where a nominee controls shares); and
      • the involvement and participation in underwriting and selling activities by unregistered individuals in private and public offerings.
    • Supervising for efforts by the firm or customers to artificially support or suppress the price, or prevent or reduce natural price falls, of securities.
  • Multiple Platform and Product Monitoring: Monitoring activity occurring across multiple platforms, including platforms that support trading in related financial instruments or correlated products, as well as cross-border activity in the same or related products.
  • Exchange-Traded Products (ETPs): Developing and maintaining a robust supervisory system to safeguard material, non-public information to prevent front running and trading ahead by:
    • establishing effective information barriers and controls to prevent information leakage and the misuse of material, non-public information;
    • reviewing for manipulative strategies that exploit the unique characteristics of ETPs (e.g., their creation and redemption processes) and strategies that exploit information leakage related to portfolio composition files (including those associated with rebalancing events); and
    • tailoring the firm’s compliance program to align with how the firm trades ETPs.
  • Wash and Prearranged Trading: Monitoring activity to identify firm customers engaging in wash trading (e.g., to collect liquidity rebates from exchanges) or prearranged trading (e.g., to create the appearance of active trading), by:
    • monitoring accounts identified as related (or in concert) in the firm’s wash/prearranged trading surveillance reports; and
    • reviewing trading activity that relates to information provided on account opening documents.

Additional Resources

  • FINRA
    • Regulatory Notice 22-25 (Heightened Threat of Fraud: FINRA Alerts Firms to Recent Trend in Small Capitalization IPOs)
    • Regulatory Notice 21-03 (FINRA Urges Firms to Review Their Policies and Procedures Relating to Red Flags of Potential Securities Fraud Involving Low-Priced Securities)
    • Regulatory Notice 19-18 (FINRA Provides Guidance to Firms Regarding Suspicious Activity Monitoring and Reporting Obligations)
    • Regulatory Notice 18-25 (FINRA Reminds Alternative Trading Systems of Their Obligations to Supervise Activity on Their Platforms)
    • Regulatory Notice 17-22 (FINRA Adopts Rules on Disruptive Quoting and Trading Activity and Expedited Proceedings)
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1 See Regulatory Notice 22-25 (Heightened Threat of Fraud).