What Is a High Close?
A high close is a strategic manipulation tactic used in stock trading that involves executing small trades at elevated prices during the final minutes of a trading session to create the illusion of strong performance.
Key Takeaways
- A high close typically involves making small trades at elevated prices just before the market closes.
- This strategy is particularly common in low liquidity stocks where minimal trading volumes can significantly impact the price.
- Candlestick charts and other technical indicators can help identify potential stock manipulations, including high closes.
Understanding a High Close
A high close primarily occurs at the close of a trading session in financial markets. The closing price is the last transaction price before the market closes, which is crucial for creating traditional stock price charts and calculating moving averages.
Since many investors closely follow closing prices, these values are susceptible to manipulation for creating an artificial impression of a stock’s upward movement. This kind of manipulation is prevalent in micro-cap stocks due to their low liquidity. By manipulating the closing prices, the value of stock derivatives or the net asset values of related mutual funds can also be misleading.
High closing practices are more commonly observed towards the end of a month or a quarter, especially in stocks with low liquidity and high information asymmetry.
Special Considerations
According to a report by economist Joel Fried from the University of Western Ontario in 2000, a high close may not have substantial economic consequences if a sufficient number of investors trade based on fundamental analysis.
Investors and traders should exercise caution when using closing prices to gauge the performance of micro-cap and small-cap stocks. Using candlestick charts and other technical indicators can provide a more comprehensive view of a stock’s activity and potential manipulations.
High Close and Stock Manipulations
Stock manipulation involves artificially inflating or deflating a security’s price for personal gain, which also includes high close strategies. These manipulations, despite being illegal, are challenging for regulators to detect, particularly in smaller company stocks that aren’t as closely scrutinized as larger companies. Penny stocks often serve as frequent targets for these schemes.
Other common forms of stock manipulation include:
- Pump and Dump: Inflating a stock’s price and then selling it off, leading to losses for other investors.
- Poop and Scoop: Deflating a stock’s price and then buying it at a lower price. This requires tarnishing a company’s reputation, which is harder to execute than inflating an unknown company’s stock price.
High closing is considered illegal and can attract regulatory penalties if proven.
Example of a High Close
Let’s take an example to understand the concept:
Assume company XYZ’s stock starts trading at $0.30 and has consistently closed at $0.32 for the past ten weeks. Trader ABC aims to increase this price to $1 within the next few weeks. In the final moments before the market closes, ABC buys significant quantities of XYZ’s stock, driving its price up to $0.60 due to the stock’s limited liquidity.
With this price increase, other traders get attracted and start buying XYZ, driving its price even higher. ABC repeats this manipulation over successive days, resulting in XYZ’s price soaring past $1 within two days as more traders jump onto the bandwagon.
Misuse of a High Close
In 2014, Athena Capital Research, a high-frequency trading firm, was charged by the SEC for manipulating the closing prices of numerous NASDAQ stocks through rapid trades executed in the final seconds of trading during a six-month period in 2009.
Using an algorithm called Gravy, Athena managed to constitute over 70% of total trading volumes for these stocks in the final moments before the market closure, pushing prices to benefit their positions. Eventually, Athena paid a $1 million penalty to settle the charges.
Related Terms: pump and dump, poop and scoop, moving averages, candlestick charts.
References
- Joel Fried. “High Closing”, Page 1. Department of Economics, University of Western Ontario, November 2000.
- Financial Industry Regulatory Authority. “Rule 2020. Use of Manipulative, Deceptive or Other Fraudulent Devices”.
- U.S. Securities and Exchange Commission. “SEC Charges New York-Based High Frequency Trading Firm With Fraudulent Trading to Manipulate Closing Prices”.
