Ethics - HELP! II(B)

FROM CFAI: Gonchar is charman of ACME futures exchange, which seeks to launch a new bond futures contract. In order to convince investors, traders etc to use it’s contract the exchange demonstrates that is has the best liquidity. To do so, it enters into agreements with members so that they commit to a substantial minumum trading volume on the new contract over a specified period in exchange for substantial reductions on their regular commissions. Is this a violation of the standard??? Then Schweser: Micahels is directors of trading at Quadrangle Brokers. Michaels has recently implemented a buy program for a client. This buy program has driven up the price a a small-cap stock, in which Islandwide owns shares, by approx 5% because the order were large in relation to the Average daily volume. Michaels’ firm is about to bring shares of an OTC firm to the market in an IPO. Miachaels has publicy announced that, as a market marker in the shares, his trading desk will create aditional liquidity in the stock over it’s first 90 days of trading by committing to minimum bids and offers of 5,000 shares and to a max spread of one-eigth. Now according to schweser there is no violation here but in the CFAI example above there is a violation. Can someone please explain the difference to me.

In the CFAI one there was no choice given as such to trade. Members were committed to trade a minimum trading volume. In the Schweser one, I didnt see any compulsion for the clients to purchase shares in the OTC firm. And I think that made a big difference.

In the first one, ACME is attempting to manipulate the market by making it seem like it the liquid-ness is from regular market activity but in reality its from a private deal with certain individuals/groups. In the second one Michaels publicly (keyword) announced that they are providing liquidity (similar to what say… a specialist on AMEX would do). He is not trying to hide the additional liquidity or manipulate the market.

Plenty of differences: 1. One as a market maker is required to provide liquidity the other is attempting to create artificial trading volume 2. One is bringing an inhouse developed product to market, the other is bringing an ipo for another company to market (differing responsibilities for both) 3. One product is OTC the other an exchange related product (lesser participants and more financial savy in OTC than exchange related)