High Close Trading Strategy: Definition, Risks & Legal Implications

High close is a trading strategy used right before the market closes for stock price manipulation. Traders attempt to make small trades at high prices during the last few minutes before the market is closed to leave an impression that the stock’s performed well. The high close strategy’s been criticized for its market manipulation purpose, and the abuse of the strategy can lead to legal issues.

Summary

• High close is a market manipulation strategy that may cause legal concerns if abused.
• The high close strategy is implemented by purchasing stocks at a higher price during the last minutes before the market closes to inflate the closing price.
• High close is often used on stocks with low prices, thin liquidity, and information asymmetry, as well as at the quarter or month-end.

Understanding the High Close Strategy

The term “close” refers to the closing price in stock trading. It is the price that is shown in typical line stock chartsHow to Read Stock ChartsIf you’re going to actively trade stocks as a stock market investor, then you need to know how to read stock charts. Even traders who primarily use fundamental analysis to select stocks to invest in still often use technical analysis of stock price movement to determine specific buy and sell, stock charting and used for moving-average calculation. The closing price is a significant factor for traders to determine the strength of a market trend.

A record-high or low closing price is often much more important than an intraday high or low, which might be reversed at the market close. Thus, the high close trading strategy was utilized with the purpose of manipulating other traders’ analyses of the market trend.

How Does High Close Work?

High close strategy is implemented around the end of a trading session of a market. Small trades can be made at high prices within the last few minutes right before the market closes to inflate the closing price. It will leave the market with an impression that the stock is rallying and thus impact the price after the market opens the next day. A higher closing price of a stock can even impact the price of derivatives of that stock.

The high close strategy is more commonly used on securities with low prices, less liquidity, and more information asymmetryAsymmetric InformationAsymmetric information is, just as the term suggests, unequal, disproportionate, or lopsided information. It is typically used in reference to some type of business deal or financial arrangement where one party possesses more, or more detailed, information than the other., such as micro-cap stocks. Typically only a small amount of money is needed to move the price as few shares are needed to be purchased. Also, a high close is often implemented at the end of a month or quarter, which is more widely used for performance analysis and reporting.

High Close Example

Here is an example for a better understanding of how the high close strategy works. Let us assume Company XYZ is a micro-cap company with thin liquidity for its stocks. The Stock XYZ is traded at $0.50 at the start of a trading day, closing around $0.55 most of the time the last month.

A trader takes the long positionLong and Short PositionsIn investing, long and short positions represent directional bets by investors that a security will either go up (when long) or down (when short). In the trading of assets, an investor can take two types of positions: long and short. An investor can either buy an asset (going long), or sell it (going short). on the stock and attempts to push the price up to $1.50 in the following days. Thus, the trader buys in a large number of stocks during the last few minutes before the market closes. Since the stock is very cheap and illiquid, the series of trades does not require a large amount of capital, and the stock price closes at $0.90 that day.

As the stock price jumps up by 80% within a single day, it attracts other traders in micro-cap stocks, which further drives up the price. The next day, the trader sells XYZ at the higher price and implements the same strategy again by purchasing back around the market close. After repeating it for several consecutive days, more and more traders long XYZ, and the stock price hits $1.50 as expected.

Market Manipulation Concerns of High Close

High close is a market manipulation strategy. Market manipulation refers to the acts of artificially inflating or deflating the security price for personal gains. Such acts are illegal and thus well hidden. Cheap and illiquid securities are often the target of market manipulation.

One of the reasons is that only a small amount of capital is required to make a significant impact on the price. Another reason is that these micro stocks are less scrutinized for unusual price movements.

Those who abused the high-close strategy in the past often attracted legal issues, such as being charged with market manipulation. In 2014, the New York-based high-frequency trading firm Athena Capital Research was charged by the U.S. Securities and Exchange Commission (SEC)Securities and Exchange Commission (SEC)The US Securities and Exchange Commission, or SEC, is an independent agency of the US federal government that is responsible for implementing federal securities laws and proposing securities rules. It is also in charge of maintaining the securities industry and stock and options exchanges with fraudulent trading to manipulate closing prices.

The company manipulated the closing prices of thousands of NASDAQ stocks by making a large number of aggressive trades during the last few seconds of almost every trading day for six months. Athena Capital agreed to cease committing further violations and paid one million dollars in penalties.

Learn More

CFI is the official provider of the Capital Markets & Securities Analyst (CMSA)®Program Page - CMSAEnroll in CFI's CMSA® program and become a certified Capital Markets &Securities Analyst. Advance your career with our certification programs and courses. certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

• MicrocapMicrocapThe term “microcap,” also known as micro-cap, is generally used for companies with a low market capitalization, usually ranging between $50 million and $300
• High-Frequency Trading (HFT)High-Frequency Trading (HFT)High-frequency trading (HFT) is algorithmic trading characterized by high speed trade execution, an extremely large number of transactions,
• LiquidityLiquidityIn financial markets, liquidity refers to how quickly an investment can be sold without negatively impacting its price. The more liquid an investment is, the more quickly it can be sold (and vice versa), and the easier it is to sell it for fair value. All else being equal, more liquid assets trade at a premium and illiquid assets trade at a discount.
• Investing: A Beginner’s GuideInvesting: A Beginner's GuideCFI's Investing for Beginners guide will teach you the basics of investing and how to get started. Learn about different strategies and techniques for trading