Blue sheets are legal documents that have been filed with the SEC to notify the public about certain upcoming initial public offerings (IPOs). In this article, we will explain what these documents are and how they help you buy IPOs at bargain prices.
What does “Painting the Tape” Mean?
When market players try to influence the price of an asset by trading among themselves to create the illusion of high activity, they are “painting the tape.” Painting the tape is an attempt to artificially increase the price of a stock by deceiving investors into believing that there is more demand for it than there is.
Understanding Painting the Tape
“Painting the tape” is prohibited by the Securities and Exchange Commission (SEC) because it results in deceptive pricing. The SEC monitors and supervises market activity to ensure that all transactions are transparent, honest, and orderly.
The expression originated when stock prices were extensively communicated by a moving tape known as a ticker. Historically, after being telegraphed, trading information was printed on ticker tape.
The printers that were used to print the thin strip of paper with stock quotes created a distinct noise, hence the name. The ticker tape has given way to an electronic version.
Market manipulators frequently target stocks with exceptionally high trading volumes because they are seen to be more appealing investments.
Painting the tape is an excellent strategy to enhance volume and tempt investors, both of which may result in a price increase.
Market manipulators offer their assets to naïve investors at artificially cheap prices after painting the tape. When the manipulation ends and the stock price falls dramatically, these stockholders are “left holding the bag.”
The aims of “painting the tape” are twofold: to persuade inexperienced buyers to purchase the asset at a high price and to artificially raise the closing price.
Marking the closing is the practice of painting the tape soon before the market closes in order to artificially raise the price of a stock.
The closing prices of the day are closely followed by the media and investors. Because most securities are valued depending on their closing prices, manipulators use this approach to boost the market worth of their assets.
Why It’s Called “Painting The Tape”
Certain market players may try to artificially raise the price of a stock in order to benefit by “painting the tape,” or making misleading assertions about the stock’s performance.
The term “ticker tape” relates to the days when stock prices were displayed on physical tapes.
Historically, stock transaction data was printed on ticker tapes and transmitted via telegraph.
A printer was used to produce the ticker tapes that announced the stock price.
A stock ticker machine would print the stock ticker and quote on thin rolls of paper.
The printers used to print stock quotes on small strips of paper generated a clicking noise as they operated.
When it comes to transmitting stock tickers and quotes, the stock market no longer uses ticker tapes or ticker print machines.
Stock quotes and ticker symbols are now sent electronically.
Stock price manipulation that appears on the “ticker tape” is known as “painting the tape.”
The word “painting” refers to the technique of generating the “illusion” of higher demand for a commodity than really exists.
How Does Painting the Tape Work?
Traders A and B want to increase interest in Company XYZ shares. They plan to “paint the tape” by trading big blocks of Company XYZ shares with one another, causing the stock’s ticker volume to skyrocket.
Unwary traders are expected to take the rise in activity as a sign of coming success and buy the stock. The share price of Company XYZ rises as a result, benefiting Traders A and B. They earn from the sale of their shares.
You may even “paint the tape” by dialing in a client’s large purchase order in five-share increments, making it look as if numerous people are fighting to buy the stock.
Example of Painting the Tape
Assume, for example, that XYZ Trading Partners managed client money and suggested stock purchases and sells. ABC Inc., a penny stock trading at $2 per share, was being unloaded by the company’s CEO.
The CEO, on the other hand, purchased shares of the company’s stock when they were just $3, so selling them today would result in a loss. The CEO eventually resorted to deceptive trading practices to induce individuals to buy shares.
The CEO bought ABC stock throughout the day, but especially when the stock price was rising.
The CEO was an eager buyer right up until the market closed. As a consequence, ABC’s average daily trading volume increased, and the stock finally achieved a new all-time high of $4 per share.
As a result of the positive signal supplied by the previous day’s price gain, trading activity surged the following day as more buyers joined the market. Trading activity increased when financial websites starting reporting ABC as one of the day’s greatest percentage gainers.
When ABC’s stock reached $6 per share, the CEO sold all of his shares, demonstrating the effectiveness of his strategy. As word of the sales spread, ABC stock began to fall.
When other investors saw the price increase for what it was, they responded rapidly to liquidate their shares. The widespread selling reduced the value of ABC stock to $1.50.
Many investors bought ABC stock and were later wiped out since there was no fundamental news to warrant a price gain. Meanwhile, the CEO of XYZ Trading Partners raised his stake by manipulative trading techniques such as “painting the tape,” to the disadvantage of his fellow investors.
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
Penny stocks are appealing to market manipulators due to the low barriers to entry afforded by their reduced regulation, trading volumes, and values.
The fact that many real price jumps in penny stocks are preceded by a significant spike in trading volume makes them perfect for painting the tape.
When monitoring spikes in trading volume to identify where to put their bets in penny stocks, day traders must use extreme care.
Most attempts at “painting the tape” manipulation disclose common orders that would be out of place in a highly competitive market, for which day traders may examine recent trading data to look for suspicious patterns in the timing and amount of trades.
In the deceptive technique of “painting the tape,” investors purchase and sell shares among themselves to make it appear as though an asset is frequently traded on the market.
Painting the tape can be used to try to artificially inflate or deflate the price of an asset through coordinated trading, or it can be used to generate the illusion of a large number of transactions without really attempting to influence the price direction.
Trading ahead of the tape, sometimes known as “painting the tape,” is a type of market manipulation that the Securities and Exchange Commission severely prohibits (SEC).
Market manipulators are more likely to target less liquid, less well-known assets due to less monitoring and smaller trade volumes. This is particularly true with over-the-counter (OTC) stocks.
Because of the high risks involved in attempting to affect the price or volume of a large market capitalization security, “painting the tape” tactics are frequently utilized to manipulate the market.
Day traders who often trade in these securities should be on the lookout for any odd trading patterns that might signal an attempt to “paint the tape” and falsely exaggerate trading volume or manipulate the instrument’s price.
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