Broker-dealer Ethics Question


Can someone please explain why the answer here is B? And what does “take only the contra side of unsolicited customer trades” the answer mean? Does it mean the broker-dealer can only operate as a broker and provide liquidity to customers and cannot trade for himself?

The answer is B because the firm has material non-public information about the firm, but they are a market maker in the firms securities. For a small issuer having a dealer make a market in your security is important for liquidity purposes, so it wouldn’t make sense for them to stop doing this altogether as that would clearly tip off the market that the firm knows something.

However, the firm probably shouldn’t continue to actively trade the securities of the firm (ie. if the MNPI relates to something positive they shouldn’t start trying to accumulate more securities). Instead they should just continue being a passive market maker, for example if a customer comes to them wanting to sell the security they should buy it and vice versa.

The standard on material non public information has a subheading covering this.

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Thanks Connor, very helpful.

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