What is layering?
Layering is a technique used by security traders during high-frequency trading, in which they attempt to manipulate the price of a stock ahead of them executing a certain transaction. The act is considered to be a type of stock market manipulation..
Key takeaways
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Layering is a high-frequency trading technique where traders manipulate stock prices by placing orders they never intend to execute.
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Traders use fake sell orders to create artificial selling pressure, causing other market participants to lower their asking prices significantly.
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Once prices fall sufficiently, the manipulator executes their real buy transaction at the lower price and cancels all fake orders.
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Swift Trade was fined £8 million by British regulators in 2011, becoming one of the first foreign firms penalized by the FSA.
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The Canadian firm eventually went out of business following the fine, demonstrating the serious consequences of this market manipulation practice.
Where have you heard about layering?
A high-profile layering example is when Swift Trade used the technique in 2011. The Canadian firm was fined £8 million by British regulators and eventually went out of business, making it one of the first foreign firms fined by the FSA (Financial Services Authority).
What you need to know about layering.
The specific actions of layering see a trader making an order they never intended to execute and then cancelling it in attempt to lower the best ask price. The way this could happen is by their action making other market participants lower their asking prices due to selling pressure arisen from seeing the sell orders being entered on the order book. Once the price has fallen significantly, the trader then executes a real transaction, buying the stock for the lower best ask price and cancelling all other sell orders.
Find out more about layering.
Understand the layering concept further by reading our definition of ask price, stock market and trader.