What is high close?

Over the past decade, financial markets in India have evolved significantly. Access to more trading opportunities, reduced costs, increased liquidity and innovative products are some of the advantages of an evolving securities market.

Simultaneously, there is an ongoing debate on whether the increased market efficiency has truly improved the market integrity. Various loopholes are a byproduct of the complex and dynamic market framework. High close is one such loophole that is used for market manipulation.

What is high close?

A high close is a strategy employed by market manipulators to inflate the price of a stock. It involves making small trades at high prices rapidly before the market closes. High close is a market manipulation technique and may attract legal action.

What is a high close in the stock market?

High close is a technique used to deliberately increase the closing price of a security. Closing price refers to the price of the stock at the end of a trading session. It is tracked actively, used to analyze the market trend, create line stock charts and for calculating moving averages. A record-high or low closing price has more significance since an intra-day high or low price may be reversed by the end of the session.

The essence of the high close strategy is to manipulate the closing price of a security. Market manipulation refers to an artificial increase or decrease in the price of a security for personal gains. Pump and dump, poop and scoop are some other techniques of market manipulation. In India, the practice of market manipulation is illegal and well-hidden. Hence, market manipulators tend to target securities that are cheap and cannot be sold easily.

A high close in the stock market is most commonly used for micro-cap securities. Micro-cap securities are less liquid and have more information disparity. The price of micro-cap securities is less and so the amount of capital required is relatively less. Micro-cap securities are also less scrutinized for uncommon price movements. Typically, a high close strategy is executed at the end of a month or quarter which is widely used to evaluate performance and related reporting.

Investors are should be vigilant to avoid losses resulting from market manipulation by employing the following methods:

1. Fundamental Analysis: It is vital to perform a thorough technical and fundamental analysis of a security before investing. Some economists believe that high close will not have any impact if investors make decisions based on fundamentals.
2. Candlestick Charts:Investors must be cautious while using closing prices to analyze micro and small-cap securities. Candlestick charts and other indicators may be used in tandem instead of solely relying on closing prices.

In India, SEBI closely monitors and regulates market manipulation activities. Entities or individuals who are convicted of such practices may be fined or even debarred from trading the market.

How Does High Close Work?

A high close in the stock market is employed close to the end of a trading session to inflate the closing price. The price of a security is a function of its demand and supply. Demand is directly proportional to the price i.e. higher the demand, the higher is the price. By entering into small trades at high prices, the demand for security is artificially inflated increasing the price of the security. The high close strategy leaves the market with the impression that the stock has rallied.

The timing of the high close strategy is equally important. To inflate the closing price of the security, the high close strategy is implemented at the end of the trading session. A higher closing price has a direct impact on the opening price of the stock in the next trading session. It can also impact the price of the stock derivative that may form part of the derivative. Similarly, the net asset value of mutual fund schemes is calculated using closing prices.

Example of a High Close

Let’s consider the example of Suzlon which is a micro-cap company currently trading at Rs. 10. Suppose the closing price for Suzlon for the last 90 days is in the range of Rs. 9.5 to Rs. 10.5 and has limited liquidity. A trader enters into a position with the view that the price of Suzlon will increase to Rs. 50 over the coming days. To inflate the price, the trader places a purchase order.

Thus, the trader places a larger purchase order of Suzlon in the final minutes before the closing of the stock market. Since Suzlon has limited liquidity, the demand for Suzlon increases. Consequently, the price of Suzlon increased to Rs. 20.

The price of Suzlon almost doubles in one trading session. Feeding into the information asymmetry and price action, other micro-cap participants purchase Suzlon shares. On a consequent day, the trader sells Suzlon in the market before acquiring it again at the end of the day. The trader uses the high close technique for two successive days and the price of Suzlon, prompting other participants to purchase more shares of Suzlon. After a few trading sessions, the price of Suzlon crosses Rs. 50.

Conclusion

Stock market high close is a precarious technique that is not identified easily. While adequate monitoring and regulation are essential to curb such manipulation. Investors are advised abundant caution while investing.