High close
This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2022) presents the technique of High Close, which is a type of market manipulation in financial markets.
Definition
High close is a form of market manipulation where manipulators send market orders to buy small quantities of financial assets just before the end of the trading session in order to inflate the closing price of these assets. The price increase created by the execution of these orders may attract the attention of more market participants, leading them to buy the assets. Manipulators use this tactic to create a false image about the asset in the market.
The targeted assets are usually microcap (stocks with a market capitalization between $50 million to $300 million) or nanocap stocks (stocks with a market capitalization less than $50 million). Such stocks –usually penny stocks– present low trading volume, low liquidity and high volatility, which make the trades of manipulators have a big market impact. Generally, manipulators target assets that are less popular, and investors don’t have much information about the market for these assets. But seeing the sudden spike in the closing prices for these assets, investors often get trapped in such assets due to the manipulation.
Mechanism
Under high close, manipulators send small market orders at a high frequency before the end of the trading session to increase the price for a given stock. The tactic gives an artificial appearance to the stock prices and lures other investors to invest in the assets, thereby creating an artificial demand and helping manipulators exit their position by selling at a higher price.
Detection
To spot and stay away from market manipulation strategies executed by manipulators, honest traders have to be extra cautious while investing in microcap or nanocap assets and carry out proper fundamental and technical analysis for securities that have information asymmetry. In the case of high close, studying the Japanese Candlestick chart of any stock can be an effective way to spot abnormal trading activities and artificially created high prices at the end of any trading session.
Financial regulation
High close is a common practice that is used by market manipulators to hamper the free and fair environment and distort the prices and trading momentum in the financial markets. Although, the regulatory bodies such as the Securities exchange commission (SEC) in the United States keep a tight watch to curb the extent of such manipulations, certain perpetrators can still manage to escape the liabilities and penalties.
Example: Athena Capital Research
The SEC convicted Athena Capital Research (a small trading firm based out in New York City) in 2014, with the charges of manipulating the prices of thousands of stocks during a 6-month period from June to December 2009 and giving the prices of these stocks an artificial appearance.
The firm indulged in the market manipulation tactic of “high close” and used sophisticated algorithms to trade in stocks at NASDAQ just before the end of the trading sessions. The traders at the firm used to place many small buy market orders a few minutes before the closing of the day after the NASDAQ issued the “Net Order Imbalance Indicator” showing the order imbalance in the buy or sell orders for the securities before the end of the trading session (the indicator helps in filling all market or limit on-close orders at the best price).
Athena Capital Research generated huge profits by artificially increasing the prices of the stocks by the end of the trading day and infusing liquidity in the market for that stock. The strategy helped the firm create a false image about the stock in the market and drew the attention of other market participants. The firm was later fined by the SEC $1 million for indulging in market manipulation and distorting the prices of thousands of stocks, thereby decreasing investor confidence.
Relevance to the SimTrade Certificate
The concept of high close relates to the SimTrade Certificate in the following ways:
About theory
- By taking the Exchange orders course, you will know more about the different type of orders that you can use to buy and sell assets in financial markets.
- By taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency.
About practice
- By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.
- By launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants, and grasp the concept of market efficiency.
More about SimTrade
Related posts on the SimTrade blog
Useful resources
SEC document about the Athena Capital Research case (2014).
Wikipedia article on “Market_manipulation”
Article written by Akshit Gupta (ESSEC Business School, Master in Management, 2022).