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FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities

A firm's compliance officer wants to detect potential front-running by traders who learn of large pending client orders. Which control is most effective as a primary detective control?

Trade surveillance that compares personal and proprietary account trades with the timing of client orders is the best detective control. Front-running depends on trading just before known client orders, so timestamp matching exposes it directly, whereas training, capital buffers and auditor rotation do not detect it.

  1. AIncreasing the number of annual compliance training hours
  2. BSurveillance comparing personal and proprietary account trades against timestamps of client ordersCorrect
  3. CRaising the firm's regulatory capital buffer
  4. DRotating the firm's external auditor every five years

Explanation

Front-running means trading ahead of known client orders. Matching employee and proprietary trade timestamps with client order times directly detects it. Training is preventive and general, while capital and auditor rotation do not address the behavior.

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