What is Painting the Tape?

Every coin has two sides. The stock market is no exception here. Robust rules, the constant eye of the watchdogs, and market regulators are all misguided in some way or the other. There is a grey area in every commercial activity where one can take chances of loopholes and manipulate the terms for their own benefit. A few market participants also manipulate and misguide the market.

Market manipulation is a form of market abuse that involves performing those actions which can misguide the investors or misrepresent the market. This form of manipulation is performed by wash trades or using electronic trading systems or by painting the tape.

This article spotlights Painting the tape meaning, how it works, and its example.

What is Painting the Tape?

Before ‘painting the tape’, it is important to understand the meaning of the tape. The Tape is a service that records and conveys the prices and volume of transactions on stock exchange via a computer device named ‘Ticker tape’. Earlier, ticker tape was used to print the financial details of trades and transactions. Currently, the electronic version of ticker tape is used.

Painting the tape is a manipulative trading strategy used by some market participants to influence stock prices. It is an illegal way to inflate the trading volume of a stock, to attract investors towards that stock, by creating a false impression of trading activity. Painting the tape is performed by a group of market players who aim to create an illusion of ‘high trading volume’ among traders, to increase the price of a particular stock. When the price increases, the manipulators can gain by exiting the stock at a higher market value.

There is a fine line between Painting the tape and ‘Wash trades’. Wash trade involves buying and selling the same security to create a false appearance of trading activity in the market. On the other hand, painting the tape is when a large volume of stocks are traded to manipulate the market.

Furthermore, when a big-sized order is broken down into several frequent smaller orders to show more trading volume on the ticker, it is also considered Painting the tape. The practice of painting the tape is strictly prohibited by the Securities and Exchange Commission.

Example of Painting the Tape

Four daily traders A, B, C, and D are holding a stock of the company PQR which is trading at Rs. 85 now. All of them bought the stock earlier at a price above Rs. 100. If they sell their stocks now, they will have to face a loss. To avoid this loss they decided to paint the tape.

They started buying and selling the stocks amongst each other. Due to this, the ticker showed spiked trading volume, and prices started moving up. This higher trading volume and price attracted the attention of many traders who are unknown of this manipulation. This leads the PQR stock price to reach Rs. 250. The traders A, B, C, and D exited their stocks at Rs. 200.

As they sold the stock, it started falling and the price went down to Rs. 80. This left many traders with huge losses.

How Does Painting the Tape Work?

‘Painting the tape’ strategy takes advantage of a common belief amongst traders that upgoing stocks with heavy trading volume are a bullish indication. Though the belief is not completely wrong, it can often be a trap. More often this happens with penny stocks as they are easy to manipulate.

It starts with the group of market participants willing to highly gain from stock. They decide to paint the tape by buying and selling the stock among themselves. This will lead to a large trading volume of that particular stock, and the price will start moving upward. Higher trading volume and increasing price of a stock on ticker may spike the interest of more traders in that stock. When more traders will start buying that stock, the stock price will tend to rise further. Then, that group of manipulators will sell their stock at a higher profit.

Another common practice of painting the tape is to buy a larger volume at the closing to get a higher closing price. As the market close is highly observed by traders, manipulators use this tactic to gain a higher market value for their stocks.

To sum up, Painting the tape is a way to manipulate the market by buying and selling securities among market participant groups, to attract the interest of investors and increase the price of that stock. This practice is prohibited to ensure compliance with manipulating transactions. Day traders or those who often trade in the market should be cautious of such market manipulating practices.