Marking the close

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"Marking the close" is a manipulative trading tactic where traders attempt to influence the closing price of a security or futures contract by executing buy or sell orders near the close of trading. This strategy can have significant implications as the closing price of a stock or other financial or emissions instrument is often used as a reference for various financial activities, including valuation, benchmarking, and the settlement of derivative contracts.[1][2][3][4]

Background and Mechanism[edit]

Marking the close, sometimes called "painting the tape," entails trading at or near the market close to artificially influence the closing price in a desired direction. By doing so, traders can benefit from the distorted closing price in subsequent trades or financial dealings.

The mechanism typically involves:

  • Identification: Determining a security whose closing price they wish to influence.[5]
  • Execution: Placing a series of buy or sell orders just before the market closes.
  • Outcome: The significant volume of these orders can drive the closing price up or down, depending on the trader's intent.

Motivations[edit]

There can be various motivations behind this manipulation:[6]

  • Portfolio Valuation: To increase the valuation of a portfolio that holds the security.
  • Performance Metrics: To meet performance benchmarks that might be tied to bonuses or other financial incentives.[7]
  • Derivative Settlement: To favorably influence the settlement price of derivative contracts linked to the security.

Regulatory Stance and Concerns[edit]

"Marking the close" is considered an unethical and illegal trading practice in many jurisdictions because it creates an artificial market environment, misleading investors and compromising the integrity of the market. Regulatory bodies such as the U.S. Securities and Exchange Commission (SEC) and the Financial Conduct Authority (FCA) have rules and surveillance mechanisms in place to detect and penalize those engaged in such manipulation.[8][9]

Historical Incidents[edit]

Over the years, there have been notable cases where firms or individuals have been penalized for marking the close. These cases often result in hefty fines and, in some instances, bans from trading.[10][11][12][13][14]

Prevention and Surveillance[edit]

Many exchanges and regulatory bodies have implemented sophisticated surveillance systems to monitor trading patterns and detect unusual trading activity indicative of "marking the close" and other manipulative practices.

References[edit]