A high close is a manipulative technique of rising stock prices by the end of a trading day. Small high-priced trades create an impression of the stock's great performance on the market, thereby misleading investors by this wrong impression. Manipulative tactics are undertaken by unscrupulous market participants for the purpose of personal gain and considered to be illegal activity on the market.
The high close is frequently used in stocks with a low liquidity level and, in contrast, with a high level of information asymmetry. The low stock liquidity characterizes it as less reliable in terms of investments’ conversion into cash, while the information asymmetry refers to the limited access to information for different types of market participants. Either of these characteristics doesn’t apply to safe and sustainable stocks for investing.
Candlestick charts used in technical analysis along with other indicators are of assistance to investors in detecting high closing as well as any other manipulations (e.g., pump and dump, poop and scoop). Any manipulation on the market usually affects the stock prices – intentionally brings them up or down.
Closing price significance
The high close is an intentionally changed closing price of a stock. The question is why the closing price is that important, and why it can impact the whole perception of the stock's performance. So, the closing price significance lies in its usage for creating line stock charts, which are a kind of orienting point for investors. Also, the closing price is involved in the process of moving averages calculation. Therefore, the high close can correct the stock representation in its favor. It can be used not only for a positive representation of the stock, but also for attracting investors’ attention to it.
Cases of the High Close use
As mentioned before, the high close takes place at the end of the trading session. Also, it’s more frequently used by the end of a month or quarter. The timing might be very important for creating a positive image of the stock.
Market participants using the high close frequently target micro-cap stocks, or stocks with the low level of liquidity and relatively low market capitalization. Often, but not always, these stocks are also characterized by low prices of securities which can be boosted quite easily. For example, if the stock price is $1.5 per share, it can be increased twice in a short period of time by an affordable sum of money.
Another reason why the small stocks attract swindlers is that they are less observed by serious market players and regulators. Therefore, smaller companies can be influenced more easily than the larger ones. Also, the possibility of detecting such manipulations as the high close in the small stocks is lower, and they can go unnoticed from time to time.
Other types of market manipulation
Besides the high close, there are some other manipulative tactics of misleading investors on the market:
- Pump and dump – is a tactic of increasing the stock’s price by false recommendations in order to sell the shares for an artificially high price and then leave cheated investors with overpriced securities. This tactic is frequently used in penny stocks.
- Poop and scoop – is similar to the previous tactic, but swindlers try to drop the stock price instead of raising it. They also use false recommendations. However, these recommendations are aimed to lower the company’s reputation down along with its share prices. As a result, the swindlers get a big “discount” on these shares.
Consequences of the High Close use
Some financial professionals aren’t bothered by high closing, because they consider that these manipulative actions don’t cause serious material damages to investors as long as they stick to the fundamental principles of stock trading. One of these economists is Joel Fried, who conducted research on high closing in 2000.
Despite these professional opinions, the high close is viewed as an unfair market activity and is punished by law. For instance, in 2014 Athena Capital Research was penalized for $1 million by the SEC for conducting illegal market activity of high closing for six months.