It is very common for a trader to seek the shares of a company stock at a low price. But, it is not in our hands to choose stock and price of it. Still, many high-frequency traders who do high-frequency trading use some use some controversial strategies to manipulate the market by influencing the price of the stock. This, by the way, is completely unethical! One of the popular strategies used in high-frequency trading is the "layering" in stock trading. Many securities traders use this scheme of layering to influence the price of stock prior to transactions they wish to execute. This allows them to create an advantageous situation to benefit from it later.
The layering in stock trading is considered as a form of stock market manipulation. This is why we believe it is worth discussing if you are not familiar with it. Although not all traders and beginner investors are aware of stock manipulation technique. But, with the knowledge, you will have the advantage to keep an eye for such stratagem.
What exactly it is?
As we mentioned above, it is a high-frequency trading strategy where a trader fakes buying and canceling the order in order to influence the stock price. A trader's intent is to purchase the stock at a low price.
It allows a trader to fool other traders or investors by causing the stock price to rise or fall.
One can use this technique either in buying or selling situation. So, let's see how a trader performs in different situations.
In Buying
Let's assume a person is planning to buy the 1000 shares of some XYZ stock of a company which is trading at $10.00 per share. In wishing to push its price down, he layered 4 large sell orders at higher prices than the current market price as:
5,000 shares at $10.05
5,000 shares at $10.10
5,000 shares at $10.15
5,000 shares at $10.20
The result, they will not sell unless the market price moves upward. On the other hand, the trader will make other to believe that a selling pressure is mounting among the shareholders of XYZ stock. If the strategy works then the other traders who are eager to sell will enter below $10.00. If that happens then the trader will be able to buy 1000 shares of XYZ stock and cancel the layered orders.
In Selling
A trader who is planning to buy the 1000 shares of XYZ stock would do just the opposite of what he did in buying. Here, we would make a layer of 4 large buy orders at low prices than the current market price as:
5,000 shares at $9.95
5,000 shares at $9.90
5,000 shares at $9.85
5,000 shares at $9.80
Rest assured, digital participants will eager to buy will enter above $10.00 per share. If that happens then the trader will be able to sell at over $10.00 per share and cancel the order.
Final Thoughts: -
After going through the above details, it is clear that layering in stock trading is nothing but the manipulation which few unethical traders using to influence the stock price and fool other traders for self-interests. In our opinion, the authority must take some action agianst traders and firms engaged in layering.
If you have any query or would like to add something up then mention it in the comment section below. We would be happy to answer all your questions.