High close is a strategy that is used in the stock market just before the closing of the market with the purpose of manipulating the stock prices. An attempt is made by the stock traders to execute a small number of trades at higher prices before the closing of the market, as result other participants of the market see that the market performed well for that day. The high close strategy gained immense criticism because of the manipulation. Misuse of the strategy can also lead to legal consensuses.
‘Close’ in the stock market stands for the closing price. The closing price is shown on the stock charts and the price is used for the calculation of the moving averages. The market trend is ascertained with the help of the closing price only. When a specific share shows a record low or high price, it has more significance for the traders and investors in comparison to the inter-day record low or high. Therefore, any manipulation arising due to the high close strategy can significantly affect the analysis of the other traders.Summary
High close strategy is executed just before the closing of the trading session. To inflate the closing prices, small trades are conducted at very high prices in the last minutes of the trading day. An impression is left on the market that the market performed well on that specific data thus, affecting the trade or the stock prices on the next trading day. A manipulated and higher closing price also has an impact on the pricing of the derivative contracts of that specific stock.
The strategy is generally executed on those securities that have lower prices, more information asymmetry and are less liquid, for example, micro-cap stocks. For the implementation of the strategy, a small sum amount is required as only a small number of shares is purchased at higher prices. Moreover, the strategy is mostly executed at the end of a quarter or a month, as during this time majority of the traders undertake the performance reporting and analysis.
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Let’s assume there is a company A, which is a micro-cap company and the liquidity on the stocks is very thin. At the beginning of the trading day, the stock of company A is trading at $0.50 and by the end of the month, the stock prices close around $0.55. the pattern continues for several months.
So, how a trader can manipulate the prices? At the end of the month, a trader takes a long position in the stocks of company A with the aim to inflate the prices of security to $1.00. To execute the same, the trader buys a larger number just before the closing of the market. The stocks are inexpensive, not liquid; therefore, the trader needs to invest a small sum of money to push the price. On that day, the price of the stock closes at $0.90.
How is the trader benefited from the manipulated prices? When other traders observe an 80% increase in a micro-cap stock, they are attracted to invest in the stock which will further push the prices in the upward direction. Let’s suppose, the next day the prices are pushed to $1.05. then the trader can make a profit from the difference ($1.05 - $0.90). Moreover, if traders repeat the high close strategy for consecutive days, then the prices can further inflate, and the earnings can expand further.
Market manipulation refers to a sudden increase and decrease in the share prices through artificial means done for personal gains. High close strategy manipulates the market by artificially inflating the share prices. Market manipulation activities are illegal and therefore hidden. Those stocks are targeted from market manipulation that are illiquid and inexpensive. Therefore, little investment is required to impact the stock prices significantly and make a profit. Moreover, these micro-cap securities are rarely scrutinised when any unusual change in the prices is observed.
If any trader is observed to be indulging in market manipulation, they often attract legal issues and strict actions are taken against them.
In the past, a case of market manipulation through a high close strategy was observed. In 2014, the US Securities and Exchange Commission (SEC) charged a firm – Athena Capital Research which is a high-frequency trading firm based in New York for manipulating the closing prices. The charge was that the company was indulged in a large number of rapid-fire and aggressive trades during the last two seconds of the trading day. The manipulation continued for six months, and thousands of stocks listed on NASDAQ were manipulated.
The trades took place in the month of June and December, Athena aimed at increasing the liquidity of the targeted stocks and push its prices and afterwards take the benefit from the position leveraged by the company. More than 70 per cent of the trading volume was manipulated at the end of the trading day. After getting into legal issues, Athena paid $1 million as a penalty after which the charges were settled.
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Open high low is a trading strategy in which the buy signal is triggered when security has a similar value for open and low. Similarly, a sell signal is triggered when the price of the security is the same for open and high. This strategy indicates that the money flow is moving towards that security whose price is increasing. Till the market closes these investments are withdrawn.