What Is Marking the Close and Why Is It Illegal?

Marking the close is a trading activity that impacts a security’s closing price. It involves executing trades near market close to influence the final reported price. This practice is a concern for market integrity due to its potential to distort market realities.

Understanding Marking the Close

Marking the close is a strategy where individuals intentionally place buy or sell orders for a security shortly before market close. This aims to artificially influence the closing price, moving it either upwards or downwards.

The closing price holds considerable importance in financial markets. It is frequently used as a benchmark for evaluating portfolio performance, investment fund valuation, and derivative contract settlement. An artificial adjustment to this price can create a misleading impression of a security’s value or portfolio performance.

This tactic creates a false appearance of demand or supply for a security, sometimes called “painting the tape.” For instance, a trader might execute buy orders before the close to inflate the price, making a held position appear more valuable. Conversely, sell orders could depress a price to avoid margin calls or reduce liabilities.

Regulatory Scrutiny

Marking the close is a prohibited form of market manipulation. Regulators view this practice as a threat to market integrity and fairness. It interferes with natural supply and demand, leading to artificial prices that do not reflect genuine market activity.

The regulatory framework aims to ensure fair trading conditions for all participants. Federal securities laws, such as the Securities Exchange Act of 1934, broadly prohibit manipulative and deceptive devices in securities transactions. These laws protect investors by promoting transparent and reliable price formation. Marking the close conveys false information, undermining investor confidence and potentially harming those who rely on legitimate closing prices.

Regulatory bodies emphasize that such practices create an artificial market environment, misleading investors. Their oversight ensures that trading activities reflect true market interest rather than contrived efforts to benefit specific positions. Maintaining market integrity and protecting investors from unfair trading practices are central tenets of financial regulation.

Identifying and Addressing Marking the Close

Regulatory bodies and exchanges employ sophisticated surveillance systems to identify instances of marking the close. These systems continuously monitor trading patterns, particularly during the final minutes of a trading session. Data analysis is used to detect unusual activity, such as sudden price swings, significant spikes in trading volume, or clusters of trades that disproportionately impact the closing price of a security.

Compliance teams also analyze a trader’s activity during the settlement period in proportion to their overall daily trading. High percentages of a trader’s total daily activity occurring within a small settlement window can indicate an attempt to influence the closing price. Robust internal controls and surveillance rules focused on end-of-day trading patterns are crucial for firms to detect and flag potential instances of this manipulation.

When marking the close activities are confirmed, regulatory bodies like the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) take various actions. These can include launching formal investigations into the individuals or entities involved. Penalties often include substantial financial fines, which can range from thousands to millions of dollars depending on the severity and scale of the misconduct. Additionally, individuals found guilty may face temporary or permanent suspensions from trading in securities. In severe cases, particularly those involving extensive fraud or repeat offenses, criminal prosecution and imprisonment are possible outcomes.