Tape Shredding

What Is Tape Shredding?

In finance, the term "tape shredding" alludes to the practice of executing a single purchase or sale order utilizing a series of more modest transactions. The term starts from before the adoption of completely mechanized trading platforms when brokers used to receive their trade orders on printed composite tape, otherwise called ticker tape.

Understanding Tape Shredding

Tape shredding is the practice of partitioning a single purchase or sale order into a series of more modest orders. By and large, brokers would do so when they accepted that it would permit them to fill the whole order all the more rapidly. Today, notwithstanding, this practice has for the most part disappeared as by far most of trades are currently executed by PCs.

Despite the fact that tape shredding by human brokers is currently a unique case, the underlying concept of tape shredding keeps on being widely utilized. As a matter of fact, PCs currently regularly break up electronic trade orders into several more modest transactions to get the most efficient conceivable execution for the market participants included.

While electronic tape shredding is seen as a legitimate and uncontroversial trade execution strategy, corrupt human brokers at times utilized the technique to benefit themselves to the detriment of their clients. It isn't viewed as an illegal activity yet is closely checked by regulatory specialists.

For instance, in 2006, the National Stock Exchange (NSE) proposed a rule changing a part of the disallowance of tape shredding to the Securities and Exchange Commission (SEC), which was accepted by the SEC.

Since brokers are frequently compensated for each order they fill, deceptive brokers would at times split up large orders into several more modest orders, basically for generating extra commissions. Since the mechanized trading platforms function for the benefit of all market participants instead of specific clients, this type of activity rarely, if at any point, happens today.

The term "tape shredding" ought not be mistaken for the practice of shredding archives, whether that be for viable purposes or to annihilate evidence of criminal bad behavior.

Tape Legacy

Before electronic trade execution became commonplace, human brokers would receive their clients' orders on physical machines that would print those orders on composite tape. These records were nicknamed "ticker tape" in light of the ticking sound made by the machines that printed them.

Albeit these machines are not generally utilized, their influence is as yet seen in different terms, for example, "tape shredding," "ticker tape," and "ticker symbol." For example, the term "ticker tape" is utilized to allude to the evenly looking over band of stock prices that are many times highlighted in stock exchanges and in financial media. Also, the term "ticker symbol" is as yet used to allude to the codes signifying various stocks, for example, "AAPL" for Apple or "TSLA" for Tesla.

Illustration of Tape Shredding

Expect Hedge Fund ABC has assets under management (AUM) of $2 billion and is in the position to buy a large order of anything that stock it accepts will be a wise investment. It chooses to purchase 300,000 shares of Company XYZ. Since 300,00 shares of Company XYZ is a large percentage of its total shares outstanding and would cause a critical shift in the stock price, Hedge Fund ABC chooses to tell its broker to "shred the tape."

Per Hedge Fund ABC's guidelines, its broker purchases shares of Company XYZ in 15,000 share increases throughout the span of seven days. This satisfies Hedge Fund ABC's orders and negligibly influences the price movement of Company XYZ's stock. The broker likewise receives a commission on each 15,000 share order they execute.

Features

• Tape shredding is legal however regulatory specialists truly do keep an eye on such practices to guarantee they are being utilized properly.
• In the past, tape shredding could be utilized for both harmless and detestable purposes. Accursed reasons included brokers expecting to increase their commissions by executing more orders.
• Tape shredding is the practice of breaking up large orders into several more modest orders.
• Ticker tape machines actually loan use to the terms "ticker symbol" and "ticker tape" while alluding to stocks and looking over stock data, separately.
• The primary justification for shredding tape was to make it more straightforward to rapidly take care of large requests.
• It was common among human brokers prior to the computerization of most trade execution activities when orders were printed on tape.