You are reading the 2026 curriculum (exams up to November 2026). Sitting in February 2027 or later? Go to the 2027 Ethical and Professional Standards guide.
Standard II(B): Market Manipulation
Do not distort prices or artificially inflate trading volume with the intent to mislead market participants. Manipulation is information-based (false or misleading statements) or transaction-based (trades creating a false picture of price or activity). Legitimate strategies, even ones that move prices, are allowed.
Before this: Standard II(A): Material Nonpublic Information
On the exam
- Demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity
- Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct
- Identify conduct that conforms to the Code and Standards and conduct that violates the Code and Standards
Demonstrate II(B), recommend procedures and identify compliant conduct. Expect "is this trading strategy manipulation?" items. The decisive phrase is intent to mislead, and the usual wrong answers call any price-moving trade manipulation.
How deeply to learn each part
- Know the idea
- Understand it in general. It frames other topics, but you will not calculate with it.
- Use it
- Understand it well enough to solve a question with it. Recognize when it applies.
- Memorize
- Learn it by heart. The exam will not give it to you.
You know this one. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still do.
You tested strong here. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still know it.
What does Standard II(B) require?
You must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants. Market manipulation damages every investor by lowering confidence in the fairness of the market, which raises risk premiums and discourages participation.
Memorize
There are two kinds, and the exam asks you to tell them apart.
- Information-based manipulation means spreading false or misleading information to induce trading by others. The classic form is the pump and dump : issue misleading positive information or over-optimistic projections to push a price up, then sell into it.
- Transaction-based manipulation covers trading where you knew, or should have known, that your actions could distort the price of a security. Examples are wash trading and matched orders that give an impression of activity or price movement, and securing a dominant position to exploit a related derivative or the underlying asset (a market squeeze ).
- Information-based manipulation Memorize misleading statements
- False rumors to induce trading by others
- Pump and dump talk up what you hold, then sell into the rise
-
- Transaction-based manipulation Memorize misleading trades
- False activity or price wash trades, matched orders
- Dominant position squeeze a derivative or the underlying asset
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- Legitimate strategy Memorize no intent to mislead
- Trades on a genuine view valuation, tax, arbitrage
-
Why is intent the test?
Trading on a genuine strategy, for example exploiting what you believe is a mispricing, is not banned. Genuine investment views, tax-motivated trades and arbitrage all move prices. What separates them from manipulation is the purpose. Disclosing a strategy can help show there was no intent to mislead.
Exam tip If a question says the trade moved the price, ignore it. Look for a false statement or a false picture of activity.
Where do the lines fall?
| Situation | Verdict |
|---|---|
| A fund manager posts an untrue claim that a small-cap’s CEO is about to resign, then shorts the stock | Violation (information-based) |
| A trader buys and sells the same thinly traded bond between two of the firm’s accounts so it looks liquid | Violation (transaction-based) |
| A manager buys a large block because of a long-term thesis and the price rises | Not a violation |
| A fund corners the deliverable supply of a commodity to force futures shorts to pay up | Violation (squeeze) |
| An investor sells losers before year-end for tax reasons and buys similar assets | Not a violation |
What should firms do?
- Require a legitimate purpose in trading and communication policies.
- Have compliance review unusual trading patterns.
- Disclose strategies where relevant.
- Train staff on what counts as manipulation.
Go deeper Why a liquidity illusion harms other investors
A stock that looks heavily traded invites buyers who believe they can get out easily. They pay for liquidity that is not real, and the people who arranged the trades gain at their expense. Over time, a market full of such tricks loses trust, and investors demand a higher return for taking part.
Go deeper Social media promotion
Online posts reach many people quickly, which makes them an easy tool for a pump and dump. A post that praises a holding without saying you own it, or exaggerates its prospects, can be information-based manipulation. The same rules apply as for any other medium.
Memorize this
MemorizeStandard II(B): two types and one test
| Type | What it is | Examples |
|---|---|---|
| Information-based | Spreading false or misleading information to induce trading | False rumors; pump and dump; exaggerated projections |
| Transaction-based | Trades that give a false impression of activity, price or liquidity, or a dominant position used to force prices | Wash trades, matched orders; squeeze of a derivative or its underlying asset |
| Legitimate | Trades on a genuine view, tax or arbitrage purposes | Not manipulation even if the price moves |
Memory hook Talk it up or trade it up: information or transactions. The test is the same for both: was it meant to mislead?
Know it cold Violation needs intent to mislead (or knowing the trades would distort). A price move alone is never enough.
- Information-based manipulation Memorize misleading statements
- False rumors to induce trading by others
- Pump and dump talk up what you hold, then sell into the rise
-
- Transaction-based manipulation Memorize misleading trades
- False activity or price wash trades, matched orders
- Dominant position squeeze a derivative or the underlying asset
-
- Legitimate strategy Memorize no intent to mislead
- Trades on a genuine view valuation, tax, arbitrage
-
How it is asked
-
Self-trading to look liquid
A trader buys and sells the same stock between two firm accounts before an offering. Violation?
Yes, II(B), transaction-based. Trap: "no client lost money" or II(A).
-
Large legitimate purchase
A pension fund buys 4% of a company on valuation research and the price rises 12%. Violation?
No. Genuine purpose, no intent to mislead. Trap: "it moved the price".
-
Classify the scheme
An analyst exaggerates a report on a stock they hold, then sells into the spike. Which type?
Information-based (pump and dump). Trap: transaction-based.
Exam traps
- Calling any large trade that moves the price manipulation. Intent to mislead is what matters.
- Missing that spreading true information is not manipulation, while spreading false or misleading information is.
- Confusing II(B) with II(A) when no inside information is involved. Manipulation concerns misleading others, not secrets.
- Thinking harm to a specific client is required. The damage is to market confidence and efficiency.
Checkpoint
3 exam-style questions. About 90 seconds each.
1A trader repeatedly buys and sells the same small-cap stock between two accounts the firm controls so that the stock appears actively traded before a client offering. Did the trader violate the Standards?
2A large pension fund buys 4% of a company's shares over two weeks based on its valuation research, and the price rises 12%. Did the fund manager violate Standard II(B)?
3An analyst holding a micro-cap stock publishes an exaggerated report and then sells the position into the price spike. This is best described as:
Key takeaways
- No distorting prices or inflating volume with the intent to mislead.
- Information-based (false rumors, pump and dump) and transaction-based (wash trades, squeezes).
- Legitimate strategies that happen to move prices are fine.
Questions about this lesson?
Where this comes back
- Standard III(A): Loyalty, Prudence, and Care Guidance for Standards I–VII
Questions candidates ask
What is market manipulation under the CFA Standards?
Practices that distort prices or artificially inflate trading volume with the intent to mislead market participants. It covers information-based manipulation, such as false rumors, and transaction-based manipulation, such as wash trades and squeezes.
Is a large trade that moves the price manipulation?
No. A large trade based on a genuine view, a tax reason or an arbitrage is legitimate. What makes it manipulation is the intent to mislead, which shows in false statements or trades designed to create a false picture.
What is a pump and dump?
Talking up an investment you own with misleading or overly optimistic information, then selling once the price has risen. It is information-based manipulation and breaches II(B).
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