High Close
Categories: Trading, Ethics/Morals
Al B. D’Vious holds a lot of shares in Musical Fruit, Inc., a company that makes musical instruments out of perishables. Al is not at all pleased with the way that stock has performed so far today. He decides to take matters into his own hands. Minutes before the closing bell sounds, he calls up several of his broker buddies and places a bunch of simultaneous buy and sell orders for Musical Fruit stock. This increase in trading volume artificially inflates the price and results in what’s known as a “high close": a closing stock price that is higher than it should be as a result of shareholder manipulation.
Mr. D’Vious is thrilled. Since most reports and news outlets tend to focus on a stock’s closing price, and not its price fluctuations throughout the day, the high close he engineered makes it look like Musical Fruit, Inc. is doing a lot better than it actually is. This good press will hopefully lead others to invest, which means those shares of his will become even more valuable. And all he had to do was artificially inflate the closing price.
If this sounds like it should be illegal, we’ve got good news: it is. But that doesn’t mean it doesn’t happen, and it can be really hard to detect and prosecute. That’s why those in the know say we shouldn’t just look at a stock’s closing price to figure out if it’s a good investment or not.
Related or Semi-related Video
Finance: What are At-the-Close Order and...24 Views
Finance a la shmoop.. What are at the close order and at the opening orders
Well simply put they're a way of buying and selling stocks and bonds and [Shmoop video on PC monitor]
they're really a hybrid form of a limit order only instead of limiting the order
of a hundred shares of Mickey D's at 45 bucks or better the "limit"
is time-based that is it is placed a minute or less from the close of the
market like 3:59 p.m. New York time or the open of the market like 9:31 a.m. New
York time got it so why would someone do this kind of limit order well if a [Man discussing limit order]
company that day before had printed what looked like a really good quarter but
upon deep inspection the investor who owned the shares thought otherwise and [Man inspecting company folder]
you know wanted to dump them well then that investor would want to take
advantage of a high opening print and just sell it whatever the price was a
minute or two after the open making the bet that the stock would then trade down
after bigger smarter better analysis was published on the stock itself and then
everyone else went to dump it - so what about an at the close order well kind
of inverse of the same thing here a company's quarter will be announced at [4:28pm shown on digital clock]
4:30 p.m. New York time tons of excitement leading up to it so
"everyone" wants to be long the stock ahead of earnings but you think
earnings will disappoint like you know buy the rumor sell the actual news kind
of vibe so you want to hold the stock until the last minute that day and then
you just give the guidance to sell the stock that last minute of trading or at [Investor sells stock to market]
the close and you're out and now we have arrived at the close of this video... Adios! [Man waving on stage]