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Painting the tape is the practice of creating misleading stock data for the purpose of manipulating stock prices. It typically occurs among brokers, traders, and other professionals who represent investors in the stock market. This practice is generally illegal as it generates false statistical data in regards to the market upon which many investors base their purchases.
The term 'painting the tape' refers to the ticker tape that originally printed stock data. Long rolls of this thin paper were traditionally fed through a stock ticker machine, which would print a company name in predetermined abbreviations and the activity of its stock. Though ticker tape is no longer in use, stock prices continue to be printed alongside corporate abbreviations and are available electronically over the Internet. A broker may paint it by attempting to influence the price of a particular stock. There are a large variety of ways in which an individual may paint the tape.
One way in which a broker might paint the tape is to call in the purchase of a large number of stocks immediately, before the market closes at the end of the month. That sale would not accurately reflect the stock's activity for the day or the month. Statistical analysis that reports on the health and activity of the market daily tends to value closing numbers more highly than the numbers gathered throughout the day. As a result, that large sale would taint the analysis of the stock in question, causing it to appear more valuable to investors than it is in reality.
Painting the tape might also occur in the form of false trading. This can happen when brokers, or other experienced market investors, agree to buy and sell a particular stock among themselves. The stock then appears to have generated a large volume of activity, indicating health and potential growth of the company it represents. This volume, however, is only attributable to its being passed between brokers and not to overall corporate growth.
Brokers may also choose to spread a purchase for a client across multiple transactions. For example, a client might request the purchase of 100 shares of a particular company, and the broker could call it in at intervals of five stocks or less. That stock's transaction numbers would then climb, falsely indicating to other investors that a purchasing frenzy is taking place in relation to potential corporate success.
A broker or trader may be accused of painting the tape when his or her stock purchasing activities do not coincide with any corporate changes. A large volume of stock purchased in a particular company, which has not made any announcements or changes to the way in which it does business, would tend to appear suspicious. In such cases, the broker or trader may be investigated, however, the activity can be difficult to prove and charges related to this crime are often not filed.
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