Painting the Tape
What Is Painting the Tape?
Painting the tape is a form of market manipulation by which market players endeavor to influence the price of a security by buying and selling it among themselves to make the presence of substantial trading activity. The goal of painting the tape is to make the illusion of an increased interest in a stock to fool investors into buying shares, which would drive the price higher.
Figuring out Painting the Tape
Painting the tape is a criminal behavior that is disallowed by the Securities and Exchange Commission (SEC) since it makes an artificial price. The SEC manages and screens financial activity in the markets to guarantee that trading is finished in a fair and orderly way.
The term originated in a former time when stock prices were to a great extent sent on a ticker tape. Ticker tapes were first used to print the financial subtleties of trades sent through a message. The name was derived by the mechanical sound from the printers that printed the narrow strip of paper that contained stock statements. Today, an electronic variant of the ticker tape is utilized.
Market manipulators realize that high trading volumes in a security frequently draw in the consideration of investors. Painting the tape increases volume and draws in investors, who then, at that point, may push the price higher. The market controllers who have painted the tape will then, at that point, sell their holdings — frequently acquired at much lower prices — to investors unaware of the manipulation. These investors are left "holding the pack" when the manipulation stops, and the price of the stock declines steeply.
Two common objectives of painting the tape are to bait clueless investors into a security and to accomplish a high closing price for the security.
Controllers might paint the tape close to the market's close trying to support a stock's price substantially at market close-a practice called denoting the close. Closing prices are widely reported in the media and are closely watched by investors. Since most securities are valued on the basis of their closing prices, controllers utilize this strategy to accomplish higher market value for their holdings.
Instance of Painting the Tape
Suppose as an illustration that XYZ Trading Partners managed money for their clients and gave counsel with regards to what stocks to buy or sell. The CEO of the firm was hoping to dump a penny stock called ABC Inc., which was trading at $2 per share. Notwithstanding, the CEO had purchased the stock at $3 and would assume a loss in the event that he sold his shares given the current market price. Subsequently, the CEO chose to participate in manipulative trading practices to get investors interested in buying the stock.
The CEO went into a number of buy trades in ABC's stock over the course of the day, especially when the stock price was rising. The CEO proceeded with his active buying into the close of the trading day. The trading activity increased the normal daily trading volume for ABC and prompted the stock closing at a multi-month high of $4 per share. Subsequently, investor interest spiked during the next trading day as investors deciphered the rising price as a bullish signal. The increase in trading volume pulled in even more investors when investment sites showed ABC as one of the greatest percentage gainers for the afternoon.
The stock of ABC rose to $6 per share and seeing that his strategy worked, the CEO sold his shares in general. At the point when the sale trades of ABC hit the tape, the stock price started to flounder. Different investors, who realized the move higher was a false move, surged in to sell their shares. The craze of selling pushed ABC's stock price lower to $1.50 per share.
Numerous investors were tricked into buying ABC's stock with no fundamental news to drive it higher, and they experienced broad financial losses subsequently. Meanwhile, the CEO of XYZ Trading Partners multiplied his investment to the detriment of others through his manipulative trading practices, including painting the tape.
Highlights
- Painting the tape increases volume and draws in investors, who then might push a price higher. The market controllers will then sell their holdings to investors unaware of the manipulation.
- Painting the tape is a type of market manipulation by which market players endeavor to influence the price of a security to the detriment of investors.
- Painting the tape is a criminal behavior and restricted by the SEC since it makes an artificial price.
