Painting The Tape Definition
Painting the tape, in financial terms, refers to illegal trading where traders try to inflate the stock prices by trading the shares with themselves. The traders behind this strategy aim to buy and sell the stocks to their account to hype the market.
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Painting tape trading is a type of stock market illusion created by traders. As a result, the rest of the market is duped into purchasing additional shares. Stock painting or wash trading are other terms for it. However, it can result in the formation of a massive bubble. Furthermore, regulators and exchanges have strict rules against using this technique.
Table of contents
Key Takeaways
- Painting the tape is a manipulation technique that allows the traders (or group) to inflate a stock price to attract other investors.
- Manipulators try to create a fake illusion by making large trades in the market. As a result, other participants buy that stock.
- By the end, the former profits and exits its position. According to the SEC, acceptable and legal proceedings are undertaken for this illegal activity.
- The term “painting” illustrates the action of the broker painting (printing) an overvalued price on the ticker tape.
Painting The Tape Trading Explained
Painting the tape in the stock market is a manipulation technique performed by a group of traders to inflate the stock prices to a level where they can make high profits. Here, the traders create a mirage of attractiveness around the mindset of the rest of the market.
However, there can be various ways of painting the tape in the stock market. Fraudulent trading (trading with oneself) is the most common method. It means that if a trader has some shares, they will sell or credit them to their share trading account, and vice versa. They will do so until the candle becomes bullish. As a result, when the stock prices peak, the trader will exit his position.
At times, traders might purchase many shares to create a bullish effect on the market. However, a single purchase will be small. The process will happen slowly. However, the market will eventually reflect the information, and the stock will rise. As a result, the initial traders will make the stock more appealing to the rest of the market.
In contrast to the practices mentioned above, painting the tape market manipulation has other forms also. A transaction will be spread across multiple traders or clients by the broker. A broker, for example, may wish to inflate the price of a technology stock. As a result, the broker will advise all of his clients to buy this stock until the candle turn green. Furthermore, the violation of painting the tape has a significant impact on consumers. As a result, the Securities and Exchange Commission (SEC) has issued specific rules for engaging in market manipulation. Individual traders and brokers who engage in this type of manipulation face fines, license suspension, and legal action.
Origin
The origin of the concept dates between the mid-1800s and late 1900s. During that era, stock prices were transmitted on ticker tapes. Therefore, these tapes were long rolls of paper inserted into the ticker machine. So, as the market opens, the company’s name and share price get printed on this paper, resulting in a ticker tape. However, in the later stages, brokers started painting a new fee on the ticker, higher than the original. As a result, it led to painting the tape market manipulation.
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Examples
Let us look at some of the examples of painting the tape strategy to elaborate the concept better:
Example #1
Let’s say that a group of traders want to manipulate the stock price of Berkshire Hathaway Inc., Which is currently trading at $50 per share. Therefore, they create artificial demand for the stock by placing many buy orders at a slightly higher price, say $51, without any real intention of buying the shares. Hence, this creates an illusion of increased demand, which can attract other investors to buy the stock, leading to a rise in its price.
Furthermore, as the price rises, the group of traders continues to place more buy orders at higher prices, say $52 0r $53, to create a perception of even higher demand. Eventually, when the stock price reaches a level that the group of traders deems high enough, they start selling the shares, realizing a profit. Therefore, this causes the stock price to plummet, leaving other investors who bought the stock at a high price with substantial losses.
In this example, the traders approached painting the tape mechanism by artificially inflating the stock price through fake buy orders.
Example #2
Market manipulation is a common mechanism in this expanding market, and it can take many forms. For example, in 2014, the Securities and Exchange Commission (SEC) filed a legal proceeding against an equity firm called Montgomery Street Research Co., where the firm’s owner purposefully influenced the market for a publicly traded stock in which he approached investors.
The firm’s owner allegedly engaged in tape painting after a company hired Montgomery to help in two private equity offerings. As a result, the SEC confirmed that the company executed roughly one hundred such trades in which the sale request arrived within 90 seconds of a purchase request for securities. Besides, the exchange board stated that the price and quantity of shares bought and sold were practically identical for all purchases and supplies. As a result of picking this market violation, the company raised over $2.5 million from shareholders.
Painting The Tape vs Wash Trade
Painting the tape and wash trade manipulation techniques are used on a large scale in the cryptocurrency and stock market. However, they have huge differences. So, let us look at them:
| Aspect | Painting The Tape | Wash Trade |
|---|---|---|
| Meaning | It refers to market manipulation of a particular stock until it reaches its maximum price. | Wash trade refers to buying and selling stocks to create a fake illusion of the market. |
| Purpose | Trade large shares and create a positive image about that stock. | To enable constant selling and buying to create misleading information about a stock. |
| Parties | Single or group of traders | Traders can conduct wash trades either single-handedly or in collaboration with both trader and broker. |
| Legality | Illegal | Illegal |
| Volume | Either large amounts of trades or a considerable lot divided into smaller segments. | Small amounts of shares. |
Frequently Asked Questions (FAQs)
The spoofing technique involves painting the ticker as the traders try to manipulate the existing market conditions. They intend to make fake purchases and sales, but it does not happen in the real world. Instead, manipulators try to place a bid or ask for orders and cancel them at the last stage. As a result, an illusion gets created among others.
FINRA (Financial Industry Regulatory Authority) plays a vital role in monitoring the financial activities in the United States. Therefore, market manipulation, such as painting the tape, spoofing, and wash trades, is illegal. Hence, FINRA has rule 5120 that prohibits such a mechanism. Moreover, this authority investigates and suspects violations of its laws related to manipulative trading practices.
Matched orders can result in this trading practice because when two orders match, trade has occurred between two parties. Therefore, this states that a buyer and seller have agreed on a price, and trade has been executed.
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