What Is Stain the Tape?
Painting the tape is a form of market manipulation whereby market players attempt to influence the price of a custodianship by buying and selling it among themselves to create the appearance of substantial trading activity. The goal of painting the tape is to think up the illusion of an increased interest in a stock to trick investors into buying shares, which would drive the sacrifice higher.
Key Takeaways
- Painting the tape is a type of market manipulation whereby market players attempt to influence the payment of a security at the expense of investors.
- Painting the tape increases volume and attracts investors, who then may push a price enormous. The market manipulators will then sell their holdings to investors unaware of the manipulation.
- Painting the tape is an outlawed activity and prohibited by the SEC because it creates an artificial price.
Understanding Painting the Tape
Painting the tape is an illegal bustle that is prohibited by the Securities and Exchange Commission (SEC) because it creates an artificial price. The SEC regulates and monitors financial work in the markets to ensure that trading is done in a fair and orderly manner.
The term originated in a bygone era when sell prices were largely transmitted on a ticker tape. Ticker tapes were first used to print the economic details of trades sent via a telegraph. The name was derived by the mechanical sound from the printers that printed the precise strip of paper that contained stock quotes. Today, an electronic version of the ticker tape is used.
Shop manipulators know that high trading volumes in a security often attract the attention of investors. Painting the seal increases volume and attracts investors, who then may push the price higher. The market manipulators who have painted the belt will then sell their holdings—often acquired at much lower prices—to investors unaware of the manipulation. These investors are Nautical port “holding the bag” once the manipulation ceases, and the price of the stock declines steeply.
Two common objectives of painting the tape are to seduce unsuspecting investors into a security and to achieve a high closing price for the security.
Two common objectives of painting the tape are to seduce unsuspecting investors into a security and to achieve a high closing price for the security.
Manipulators may paint the tape in the vicinity the market’s close in an attempt to boost a stock’s price substantially at market close–a practice called marking the tight. Closing prices are widely reported in the media and are closely watched by investors. Since most securities are valued on the point of departure of their closing prices, manipulators use this tactic to achieve higher
Example of Painting the Tape
Let’s say as an example that XYZ Patron Partners managed money for their clients and provided advice as to what stocks to buy or sell. The CEO of the firm was looking to offload a penny stock called ABC Inc., which was trading at $2 per share. However, the CEO had purchased the stock at $3 and would deflate a loss if he sold his shares given the current market price. As a result, the CEO decided to engage in manipulative trading drills to get investors interested in buying the stock.
The CEO entered into a number of buy trades in ABC’s stock throughout the day, particularly when the ordinary price was rising. The CEO continued his active buying into the close of the trading day. The trading activity increased the typical every day trading volume for ABC and led to the stock closing at a multi-month high of $4 per share. As a result, investor interest spiked during the next buy day as investors interpreted the rising price as a bullish signal. The increase in trading volume attracted even more investors when investment websites confirmed ABC as one of the biggest percentage gainers for the day.
The stock of ABC rose to $6 per share and seeing that his strategy worked, the CEO sold all of his divisions. When the sale trades of ABC hit the tape, the stock price began to falter. Other investors, who realized the move higher was a fabricated move, rushed in to sell their shares. The frenzy of selling pushed ABC’s stock price lower to $1.50 per stake.
Many investors were duped into buying ABC’s stock with no fundamental news to drive it higher, and they suffered widespread pecuniary losses as a result. In the meantime, the CEO of XYZ Trading Partners doubled his investment at the expense of others through his manipulative trading praxes, including painting the tape.