What Is Painting the Tape?
Painting the tape is one of those market manipulation by which market avid players attempt to have an effect on the price of a security by means of buying and selling it among themselves to create the illusion of substantial purchasing and promoting process. The target of painting the tape is to create the illusion of an upper pastime in a stock to trick investors into buying shares, which would possibly energy the associated fee higher.
Key Takeaways
- Painting the tape is a kind of market manipulation by which market avid players attempt to have an effect on the price of a security at the expense of investors.
- Painting the tape will build up amount and attracts investors, who then would possibly push a price higher. {The marketplace} manipulators will then advertise their holdings to investors unaware of the manipulation.
- Painting the tape is an criminality and prohibited by means of the SEC because it creates an artificial price.
Figuring out Painting the Tape
Painting the tape is an criminality that is prohibited by means of the Securities and Change Rate (SEC) because it creates an artificial price. The SEC regulates and displays financial process inside the markets to ensure that purchasing and promoting is finished in a very good and orderly manner.
The time frame originated in a bygone era when stock prices have been largely transmitted on a ticker tape. Ticker tapes have been first used to print the financial details of trades sent by way of a telegraph. The establish was once as soon as derived by means of the mechanical sound from the printers that printed the narrow strip of paper that contained stock quotes. At the moment, an virtual type of the ticker tape is used.
Market manipulators know that prime purchasing and promoting volumes in a security frequently draw within the eye of investors. Painting the tape will build up amount and attracts investors, who then would possibly push the associated fee higher. {The marketplace} manipulators who have painted the tape will then advertise their holdings—frequently purchased at so much lower prices—to investors unaware of the manipulation. The ones investors are left “protective the bag” as quickly because the manipulation ceases, and the price of the stock declines steeply.Â
Two no longer bizarre objectives of painting the tape are to lure unsuspecting investors into a security and to achieve a best closing price for the safety.
Manipulators would possibly paint the tape with regards to {the marketplace}’s close in an attempt to boost a stock’s price significantly at market close–a practice referred to as marking the close. Ultimate prices are widely reported inside the media and are carefully watched by means of investors. Since most securities are valued on the basis of their closing prices, manipulators use this tactic to achieve higher market value for their holdings.
Example of Painting the Tape
Let’s say as an example that XYZ Purchasing and promoting Partners managed money for their shoppers and provided advice as to what stocks to buy or advertise. The CEO of the corporate was once as soon as looking to unload a penny stock referred to as ABC Inc., which was once as soon as purchasing and promoting at $2 in keeping with share. Then again, the CEO had purchased the stock at $3 and would take a loss if he presented his shares given the existing market price. As a result of this, the CEO decided to engage in manipulative purchasing and promoting practices to get investors eager about buying the stock.
The CEO entered into a lot of acquire trades in ABC‘s stock right through the day, in particular when the stock price was once as soon as rising. The CEO continued his full of life buying into the close of the purchasing and promoting day. The purchasing and promoting process upper the usual daily purchasing and promoting amount for ABC and ended within the stock closing at a multi-month best of $4 in keeping with share. As a result of this, investor pastime spiked right through the next purchasing and promoting day as investors interpreted the rising price as a bullish signal. The upward thrust in purchasing and promoting amount attracted a lot more investors when investment internet websites showed ABC as probably the most necessary largest share gainers for the day.
The stock of ABC rose to $6 in keeping with share and seeing that his method worked, the CEO presented all of his shares. When the sale trades of ABC hit the tape, the stock price began to falter. Other investors, who realized the switch higher was once as soon as a false switch, rushed in to advertise their shares. The rush of marketing pushed ABC‘s stock price lower to $1.50 in keeping with share.
Many investors have been duped into buying ABC‘s stock with no fundamental data to energy it higher, they most often suffered standard financial losses as a result. Inside the meantime, the CEO of XYZ Purchasing and promoting Partners doubled his investment at the expense of others via his manipulative purchasing and promoting practices, along with painting the tape.
