LE Paper 1 · Topic 9

Market misconduct and improper trading practices

Expect several Paper 1 questions that hand you a trade or a statement and ask which form of market misconduct it is, whether a defence applies, which forum hears it and what that forum can order. The SFO defines six forms of market misconduct and gives each a civil version before the Market Misconduct Tribunal (Part XIII) and a criminal version in the courts (Part XIV). Learn the two tracks side by side, then the conduct rules on unsolicited calls, front running, churning and fund dealing abuses.

11 min read7 sections

Checked against the Securities and Futures Ordinance (Cap. 571) Parts XIII and XIV, s.4, s.174, s.193-s.194, s.213 and Schedule 9 (HKLII mirror of eLegislation, consolidated text current to August 2025); the Securities and Futures (Unsolicited Calls - Exclusion) Rules (Cap. 571A); the Securities and Futures (Price Stabilizing) Rules (Cap. 571W); the AMLO (Cap. 615) s.5 and s.21; the SFC Code of Conduct, Fund Manager Code of Conduct (October 2024) and Code on Unit Trusts and Mutual Funds, as at October 2026. Independent prep, not endorsed by HKSI Institute or the SFC.

Must-know for the exam

Six forms of market misconduct: insider dealing, false trading, price rigging, disclosure about prohibited transactions, false or misleading information, stock market manipulation (SFO s.245(1); civil s.270-s.278, criminal s.291-s.299).
Connected persons include directors and employees of the company or a related corporation, 5%+ shareholders, advisers with access, and anyone who was so placed within the previous 6 months (SFO s.247).
A tippee is caught only if he knows his source is connected and holds the information because of that connection; there is no general possession test (SFO s.270(1)(e), s.291(5)).
The Market Misconduct Tribunal: a judge chairs with 2 members who are not public officers; civil standard of proof; the SFC institutes proceedings with the Secretary for Justice's consent (s.251, s.252, s.252A).
Tribunal orders: disqualification and cold-shoulder up to 5 years, cease and desist, disgorgement plus compound interest, costs, disciplinary referral. It cannot fine or imprison for market misconduct (s.257, s.259).
Part XIV offences: up to HK$10 million and 10 years' imprisonment on indictment; HK$1 million and 3 years on summary conviction (SFO s.303(1)).
One route only: no Tribunal case once Part XIV proceedings are pending or concluded for the same conduct, and no prosecution after Tribunal proceedings (SFO s.283, s.307).
False or misleading information: negligence is enough before the Tribunal (s.277) but the offence needs knowledge or recklessness (s.298). Fraudulent devices (s.300) are criminal only.
Investors may sue for loss without a Tribunal finding or conviction if fair, just and reasonable; tainted trades stay valid (SFO s.280, s.281, s.304, s.305).
Unsolicited call breach: level 5 fine (HK$50,000); client may rescind within 28 days of the agreement or 7 days of awareness, whichever is earlier (SFO s.174(5)-(6)).

On this page · 7 sections

Traps that cost marks

Candidates think only staff of the listed company itself are insiders, or that leaving the job ends the connection at once.
Assuming resignation cuts the link at once. The SFO looks back 6 months from the dealing.
Using the wrong threshold. For insider dealing, a substantial shareholder means an interest in 5% or more.
Thinking only directors, employees and shareholders are insiders. Advisers' staff are connected through the professional relationship.
Thinking the tipper is safe if she does not trade, or that a tippee escapes because he is not connected himself.
Applying a 'possession' test. Under the SFO the tippee must know the source is a connected person.
Treating any price-moving view or rumour as inside information. It must be specific and not generally known.
Thinking an OTC or cash-settled derivative is outside the rules. The definition of derivatives is deliberately wide.

Six forms, two tracks

Part XIII of the SFO lets the SFC take market misconduct to the Market Misconduct Tribunal on the civil standard. Part XIV makes the same six forms criminal offences, prosecuted in the courts on the criminal standard. Each Part XIV offence mirrors a Part XIII form, with the same defences in each.

Form	What it catches	Civil (Part XIII)	Criminal (Part XIV)
Insider dealing	Connected persons, offerors and tippees dealing, procuring or tipping on inside information	s.270	s.291
False trading	Creating a false or misleading appearance of active trading, or of the market or price; wash trades and matched orders are presumed	s.274	s.295
Price rigging	Wash sales that affect the price; fictitious or artificial transactions or devices	s.275	s.296
Disclosure of information about prohibited transactions	Saying a price will move because of manipulation you or an associate did, or were paid by	s.276	s.297
Disclosure of false or misleading information inducing transactions

Premium

Every note. Every question. One pass.

5 more sections of this note are part of Premium.

Every section of every study note
Every question in every live HKSI paper
Full timed mock exams
A worked explanation on every question
Your full mistake bank and weak-area review

Unlock with Premium

From ≈HK$49.83/mo on the Until-you-pass pass (12 months)

Exam-style questions

← Previous note: Accessing public capital All study notes

← All study notes

LE Paper 1 · Topic 9

Market misconduct and improper trading practices

11 min read7 sections

Must-know for the exam

Six forms of market misconduct: insider dealing, false trading, price rigging, disclosure about prohibited transactions, false or misleading information, stock market manipulation (SFO s.245(1); civil s.270-s.278, criminal s.291-s.299).
Connected persons include directors and employees of the company or a related corporation, 5%+ shareholders, advisers with access, and anyone who was so placed within the previous 6 months (SFO s.247).
A tippee is caught only if he knows his source is connected and holds the information because of that connection; there is no general possession test (SFO s.270(1)(e), s.291(5)).
The Market Misconduct Tribunal: a judge chairs with 2 members who are not public officers; civil standard of proof; the SFC institutes proceedings with the Secretary for Justice's consent (s.251, s.252, s.252A).
Tribunal orders: disqualification and cold-shoulder up to 5 years, cease and desist, disgorgement plus compound interest, costs, disciplinary referral. It cannot fine or imprison for market misconduct (s.257, s.259).
Part XIV offences: up to HK$10 million and 10 years' imprisonment on indictment; HK$1 million and 3 years on summary conviction (SFO s.303(1)).
One route only: no Tribunal case once Part XIV proceedings are pending or concluded for the same conduct, and no prosecution after Tribunal proceedings (SFO s.283, s.307).
False or misleading information: negligence is enough before the Tribunal (s.277) but the offence needs knowledge or recklessness (s.298). Fraudulent devices (s.300) are criminal only.
Investors may sue for loss without a Tribunal finding or conviction if fair, just and reasonable; tainted trades stay valid (SFO s.280, s.281, s.304, s.305).
Unsolicited call breach: level 5 fine (HK$50,000); client may rescind within 28 days of the agreement or 7 days of awareness, whichever is earlier (SFO s.174(5)-(6)).

On this page · 7 sections

Traps that cost marks

Candidates think only staff of the listed company itself are insiders, or that leaving the job ends the connection at once.
Assuming resignation cuts the link at once. The SFO looks back 6 months from the dealing.
Using the wrong threshold. For insider dealing, a substantial shareholder means an interest in 5% or more.
Thinking only directors, employees and shareholders are insiders. Advisers' staff are connected through the professional relationship.
Thinking the tipper is safe if she does not trade, or that a tippee escapes because he is not connected himself.
Applying a 'possession' test. Under the SFO the tippee must know the source is a connected person.
Treating any price-moving view or rumour as inside information. It must be specific and not generally known.
Thinking an OTC or cash-settled derivative is outside the rules. The definition of derivatives is deliberately wide.

Six forms, two tracks

Form	What it catches	Civil (Part XIII)	Criminal (Part XIV)
Insider dealing	Connected persons, offerors and tippees dealing, procuring or tipping on inside information	s.270	s.291
False trading	Creating a false or misleading appearance of active trading, or of the market or price; wash trades and matched orders are presumed	s.274	s.295
Price rigging	Wash sales that affect the price; fictitious or artificial transactions or devices	s.275	s.296
Disclosure of information about prohibited transactions	Saying a price will move because of manipulation you or an associate did, or were paid by	s.276	s.297
Disclosure of false or misleading information inducing transactions

Premium

Every note. Every question. One pass.

5 more sections of this note are part of Premium.

Every section of every study note
Every question in every live HKSI paper
Full timed mock exams
A worked explanation on every question
Your full mistake bank and weak-area review

Unlock with Premium

From ≈HK$49.83/mo on the Until-you-pass pass (12 months)

Exam-style questions

← Previous note: Accessing public capital All study notes

Insider dealing: who is connected and what is inside information

Inside information is specific information about a listed corporation, its shareholders or officers, or its listed securities or derivatives, that is not generally known to those who deal in the securities but would be likely to materially affect the price if it were (s.245(2); the same definition applies to the disclosure duty in s.307A).

•Connected persons (s.247): directors and employees of the corporation or a related corporation; substantial shareholders (an interest in 5% or more); people whose own or their employer's professional or business relationship gives them access, such as lawyers, auditors and bankers; and anyone who was in one of those positions in the 6 months before the dealing.
•Information received in a privileged capacity (s.248): public officers, Legislative and Executive Council members, and staff of the Exchange, clearing houses and exchange participants are connected when they receive inside information in that capacity.
•Take-over offerors (s.270(1)(b)): a person contemplating an offer may deal for the purpose of the offer, but not otherwise.
•Tipping (s.270(1)(c)): a connected person who passes on inside information, expecting the recipient to deal, has engaged in insider dealing even if he never trades.
•Tippees (s.270(1)(e)): a recipient is caught if he knows the source is connected and knows or has reasonable cause to believe the source holds the information because of that connection.
•Derivatives of the listed securities are caught whether or not they are listed, so an OTC swap is no escape (s.245(2)).

Trap: applying a possession test. Hong Kong uses connection: a stranger who overhears a rumour, not knowing the speakers are connected, is not a tippee.

Takeaway: Inside information is specific, not generally known and price-sensitive; the dealer must be connected, an offeror or a knowing tippee.