Painting the tape is a form of securities fraud where participants create a false appearance of trading activity for a security by buying and selling the security among themselves. Painting the tape can attempt to artificially increase or decrease the price of a security through coordinated trading, or merely give the impression of a high volume of trades without any effort to influence the direction of the price.
Painting the tape is illegal, and the Securities and Exchange Commission (SEC) enforces regulations against painting the tape and similar attempts at market manipulation.
Common Practices in Painting the Tape
While coordinated trading of a security can take many forms for many different purposes, there are some common practices among market manipulators that involve painting the tape.
Probably the simplest and most common market manipulation that involves painting the tape is to artificially inflate the trading volume of a security. Many traders, day traders in particular, are attracted to securities within a sudden spike in volume far above the daily average. This attraction tends to lead to an increase in the price of a security, which then allows the market manipulators to dump their holdings at an inflated price.
Another common tactic involving painting the tape is to drive the price of a security up right at closing time when volumes tend to be lower. This effort leads to a substantially higher closing price, which can often influence market sentiment toward a security, thereby artificially inflating the trading price over the subsequent few trading sessions.
Painting the Tape and Penny Stocks
Market manipulators in general are drawn to penny stocks as the lower levels of regulation and lower trading volumes and values provide a more effective backdrop for most market manipulation schemes. Painting the tape in particular is more effective with penny stocks because many genuine spikes in penny stock prices are preceded by a sharp increase in trading volume.
Day traders who trade in penny stocks need to be extra cautious when identifying potential trades by looking at recent spikes in trade volumes. Day traders can examine recent trading information to look for suspicious patterns in the timing and volume of trades, as most painting the tape manipulation attempts tend to betray familiar orders that would be out of place in a truly competitive market.
Most efforts of market manipulation will be focused at more obscure and low volume securities (especially OTC stocks), as these tend to face lighter regulation and scrutiny and present a more malleable backdrop for market manipulation tactics.
This is particularly true of market manipulation efforts that involve painting the tape because of the large potential cost of attempting to manipulate the price or volume of a security with a high market capitalization.
Day traders who often trade in these sorts of securities should be on the lookout for suspicious trading activity that might signal an effort to paint the tape and artificially increase trading volume or influence the direction of the security’s price.