The Strategy of “Marking the Close” A Prohibited Practice in Financial Markets

In the world of finance, where every tick and fluctuation matters, strategies like “marking the close” have gained traction among traders and investors. Marking the close refers to the practice of executing large buy or sell orders near the end of a trading day to influence the closing price of a security. This article explores the intricacies of marking the close, its impact on markets, and how regulators are addressing this phenomenon.

Understanding Marking the Close:

Marking the close involves placing significant orders, often in the final minutes of trading, with the intention of pushing the closing price of a security in a particular direction. Traders employ this strategy to create favorable closing prices for their positions, thereby maximizing profits or minimizing losses.

How Marking the Close Works:

Traders executing marking the close strategies typically analyze market dynamics and order flow throughout the trading day. As the closing bell approaches, they enter large orders that can significantly impact the supply and demand balance of the security. By strategically placing these orders, traders aim to influence the closing price in their favor.

Types of Marking the Close Strategies:

1. Bullish Marking: Traders employing bullish marking strategies place large buy orders near the close to drive up the closing price of a security. This tactic can create a positive perception of the security’s performance and attract additional buyers.
2. Bearish Marking: Conversely, bearish marking involves placing large sell orders to drive down the closing price of a security. This strategy can be used to create a sense of pessimism among investors and prompt selling activity.

Impact on Market Dynamics:

Marking the close can distort the true supply and demand dynamics of a security, leading to artificial price movements. While this strategy may yield short-term gains for individual traders, it can introduce volatility and uncertainty into the market, potentially disadvantaging other market participants.

Oil and Gas Investment

A Midwest-registered representative with many years experience with investments in North Dakota and Colorado oil and gas companies recently entered into a Letter of Acceptance, Waiver and Consent (AWC) with the Financial Industry Regulatory Authority (FINRA) settling charges that he allegedly marked the close in order to preferentially influence a stock price in June 2009. According to the AWC, the respondent had discussions with senior management about the firm’s possible participation in an upcoming shelf offering of shares of a Minnesota-based oil and gas production company. Then, early June 23, 2009, he allegedly gave a trader a sheet of paper containing account numbers and quantities of the company’s shares and informed the trader that he would call him later with trading instructions probably near the close.

Minutes Before Close

The AWC disclosed that about 19 minutes before the 4 p.m. ET close, the respondent called the trader and told him to place the orders “in like ten minutes at 2:50 [Central time] or even wait” a few minutes later. He learned that the days volume on the stock was 221,000 and then instructed the trader to  ”close the thing over six if you can.” The respondents five buy orders totalled 37,000 shares and represented 58 percent of the oil and gas companys total trading volume during the last 10 minutes of trading. Furthermore, the national best bid and offer moved from $5.98  to $6, approximately eight minutes prior to the close and then to $6.09 $6.10 at the close.

Regulatory Response:

Regulators closely monitor trading activity, including marking the close, to ensure the integrity and fairness of financial markets. Regulatory bodies such as the Securities and Exchange Commission (SEC) in the United States and the Financial Conduct Authority (FCA) in the United Kingdom have implemented rules and surveillance mechanisms to detect and prevent manipulative trading practices.

SEC and FINRA Violations

The above-described conduct was found to be in willful violation of Section 10(b) of the Securities Exchange Act of 1934 (regulation of the use of manipulative and deceptive devices),  its Rule 10b-5 (employment of manipulative and deceptive devices), and of FINRA Rule 2020 (use of manipulative, deceptive, or other fraudulent devices) and 2010 (ethical standards). The respondent was fined $25,000 and suspended from association with any FINRA member in all capacities for 40 calendar days.

Best Practices for Investors:

For investors navigating the complexities of financial markets, understanding the implications of marking the close is essential. By staying informed about market dynamics and regulatory developments, investors can make informed decisions and mitigate risks associated with manipulative trading strategies.

Conclusion:

Marking the close represents one of the many tactics employed by traders to influence market prices and gain a competitive edge. While this strategy can yield short-term benefits for individual traders, its broader impact on market integrity and investor confidence cannot be overlooked. As regulators continue to enhance surveillance and enforcement measures, investors must remain vigilant and adopt best practices to navigate the evolving landscape of financial markets.