Marking the Close: Manipulative Trading and FINRA Rules
‘Marking the Close’ is a term that is frequently used when investors in the stock market try to undermine the closing price of a stock by making several last-minute buy or sell orders right before the market closes. In the securities world, this is considered to be a sly move to make the stock end the day at a specific price for their own gain. Since this action is extremely frowned upon in the securities industry, those that partake can face serious consequences.
How Does Marking the Close Work?
Typically, this manipulation involves artificially influencing the price of a security at the market’s closing time. Here’s how it works:
Objectives: Individuals typically involve themselves in this practice for their own reasons. They might want the stock to close at a particular price to hit certain goals, or to influence their investments like options or derivatives contracts. However, it’s important to understand that this manipulation benefits the individual and is directly tied to the closing price of the security.
Volume: To execute this strategy successfully, traders or investors looking to mark the close will place a significant volume of buy or sell orders for the targeted security shortly before the market’s official closing time. These particular orders are usually strategically placed at or near the prevailing closing price.
Timing: Timing is crucial in this manipulation as well. These orders are typically executed in the final moments leading up to the market’s closing time. This makes it challenging for other market participants to react or counteract the manipulation.
Impact: The key to marking the close often lies in the sheer volume of orders. By flooding the market with a high volume of buy or sell orders, the manipulators can create an artificial imbalance between supply and demand, pushing the closing price in their desired direction. If successful, the manipulators can influence the closing price to close at the level they desire, even if it doesn’t accurately reflect the security’s fair value based on market supply and demand dynamics.
Marking the close is generally considered market manipulation and is illegal in most financial markets. Regulatory bodies closely monitor trading activities to detect and prevent such manipulation. Violators can face penalties, including fines, trading restrictions, and legal actions. Regulatory authorities like the Financial Regulatory Authority (FINRA) or the Securities and Exchange Commission (SEC), employ various tools and surveillance techniques to identify unusual trading patterns or orders placed near the market close. They also maintain rules and safeguards to prevent and deter market manipulation, ensuring fairness and integrity within the market.
Market Manipulation in Action
In October of 2014, The Securities and Exchange Commission (SEC) took action against a high-frequency trading firm, Athena Capital Research, for manipulating the closing prices of numerous NASDAQ-listed stocks during a six-month period in 2009. Athena employed an algorithm known as “Gravy” to practice “marking the close,” a strategy where they bought or sold stocks just before the market closed to influence the closing price. Their substantial volume of last-minute trades overwhelmed the market, artificially driving prices in their favor.
Athena agreed to a $1 million penalty. Notably, this case marked the SEC’s first instance of addressing high-frequency trading manipulation, and it underscored the SEC’s commitment to pursuing market manipulators, irrespective of their trading sophistication. The manipulation specifically targeted order imbalances at the close of the trading day, exploiting these imbalances by ensuring their orders received priority treatment. This led to manipulation of closing prices and impacted the closing auction process. The SEC issued a censure against Athena for breaching securities laws, and the firm consented to both the penalty and refraining from future violations.
FINRA on Marking the Close
FINRA (Financial Industry Regulatory Authority) strictly enforces a range of rules and obligations on its member firms to uphold the integrity of the financial industry. These regulations collectively aim to prevent manipulative and fraudulent trading practices, ensuring ethical behavior in the financial sector.
FINRA Rule 2020 has a direct correlation to marking the close due to its structure surrounding fair and honest practices within the securities industry. This rule prohibits any member firm or associated person from employing manipulative, deceptive, or fraudulent devices in connection with the purchase or sale of any security. In essence, it aims to maintain the integrity of the securities market by preventing unfair or fraudulent practices that could harm investors or undermine market confidence.
Examples of activities that could be in violation of Rule 2020 include market manipulation, insider trading, churning (excessive trading to generate commissions), and other forms of deceitful behavior. Similar to violating other FINRA rules, the action of abusing this rule can result in regulatory actions, fines, suspensions, or other penalties imposed by FINRA.
According to FINRA, there are several effective practices in the context of surveillance and compliance within the financial industry one could take to keep a watchful eye on manipulative trading. Some of these practices include:
Detecting Manipulative Schemes: Reviewing both customer and proprietary data to detect manipulative trading schemes, such as momentum ignition, layering, front running, spoofing, and other tactics that pertain to correlated securities and financial instruments.
Monitoring Multiple Platforms and Products: Keeping a close eye on activities occurring across various platforms and related financial instruments or correlated products to ensure compliance.
Algorithmic Trading: Using Regulatory Notice 15-09 guidance to inform surveillance programs for firms engaged in algorithmic trading. This includes risk assessment, software development and implementation, testing, and compliance.
ETPs (Exchange-Traded Products): Creating a supervisory system aimed at averting front running and trading ahead through the establishment of information barriers, the examination of manipulative tactics, and adapting compliance programs to the firm’s Exchange Traded Products trading practices.
Do I Need a Securities Fraud Attorney?
Investors could face financial losses as a result of broker negligence or investment fraud related to manipulative trading. A securities lawyer works on behalf of investors to pursue claims against brokers, financial advisors, and brokerage firms in order to seek compensation for losses resulting from fraud or negligence.
The FINRA arbitration lawyers at The White Law Group have managed more than 700 FINRA arbitration cases, encompassing issues such as unauthorized trading, unsuitable investments, fraud, negligence, excessive trading (churning), and improper margin use. The White Law Group, LLC is a national legal firm specializing in securities fraud, securities arbitration, investor protection, and securities regulation and compliance. Our offices are located in Chicago, Illinois, and Seattle, Washington.
To schedule a free consultation with a securities attorney, please contact our office at 888-637-5510 or visit our website at https://whitesecuritieslaw.com/
Tags: manipulative trading Last modified: November 7, 2023