What Is a High Close?
Let me tell you directly: a high close is a trading strategy that stock manipulators employ, involving small trades at high prices right in the final minutes of trading to create the impression that the stock has performed exceptionally well.
Key Takeaways
You need to know that a high close is essentially a stock manipulation tactic where those small trades at high prices happen during the closing minutes. It's particularly popular with stocks that have low liquidity and significant information asymmetry. As an investor, you can use indicators like candlestick charts to spot if any trading manipulations have occurred.
Understanding a High Close
A high close takes place at the end of a trading session in the financial markets. The closing price is simply the price of the last trade before the session ends, and these prices form the basis for traditional line stock charts and calculations of moving averages.
Because closing prices are so widely followed, traders can manipulate them to make it look like a stock is rallying. This high close practice is especially common with micro-cap stocks that lack liquidity, since you don't need much dollar volume to push the price up. These closing prices can also inflate the value of stock derivatives or affect mutual fund net asset values.
Most of this manipulation via high closing occurs at the end of a month or quarter. Stocks with low liquidity and high information asymmetry are the most vulnerable.
Special Considerations
A 2000 report by economist Joel Fried from the University of Western Ontario, titled 'High Closing,' concluded that there's no material economic consequence to a high close as long as several investors are trading based on fundamentals.
You should be cautious about using closing prices to judge the success of micro- and small-cap stocks. Instead, look at candlestick charts and other indicators for better insight. Since closing prices are monitored by serious investors, manipulators use high closes to generate buzz and attract more buyers.
High Close and Stock Manipulations
Stock manipulation means artificially inflating or deflating a security's price, and high close is one such illegal practice that leads to personal gain. Regulators often struggle to detect these, but manipulators target smaller companies because their share prices are easier to influence. Penny stocks are frequent targets compared to larger firms that get more analyst scrutiny. This is also known as price manipulation or market manipulation.
Beyond high close, other manipulations include pump and dump, where a micro-cap stock is artificially inflated and then sold off, leaving others with losses. There's also poop and scoop, the reverse, which is rarer because it's harder to damage a reputable company's image than to hype an unknown one.
Important Note
High closing is a form of stock manipulation, and if abused, it can lead to regulatory violations.
Example of a High Close
Consider company ABC's stock starting the day at $0.30, with closing prices at $0.32 for the last ten weeks. Trader XYZ takes a position, expecting it to reach $1 soon. In the final minutes, XYZ buys large quantities of ABC stock. Given the low liquidity, this pushes the price to $0.60.
The stock appears to have doubled, drawing in other micro-cap traders. The next day, XYZ sells during the day but buys back at the close, repeating the high close for two days. More traders buy in, and ABC's price exceeds $1.
Misuse of a High Close
In 2014, the SEC charged high-frequency trading firm Athena Capital Research for placing numerous aggressive trades in the last two seconds of nearly every trading day over six months to manipulate closing prices of thousands of NASDAQ-listed stocks.
From June to December 2009, Athena aimed to increase liquidity and push prices up for their benefit using an algorithm called Gravy. This algorithm accounted for over 70 percent of the trading volume in those final seconds. Athena paid a $1 million penalty to settle the charges.
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