The stock of Iridex Corp., a maker of lasers used to treat visual ailments, had been hovering around $3.43 all day on June 29. At 3:55 p.m., five minutes before the market close, it took off. It moved to $3.65, then $3.80. Less than a half second before the trading day and calendar quarter ended, Iridex jumped 4% to $4.17, capping a nearly 22% rise for the day. ... The next trading day, July 2, Iridex dropped 10%—and it didn't hit $4 again until late October.
Regulators and market analysts have an explanation for the unusual pattern. They say some money managers wait until the waning moments of the quarter to bid aggressively for more shares of a stock they already own, which drives up the value of their entire position in the stock. That, in turn, boosts their performance at the very moment when they report results, making their funds look more appealing to potential investors. Even if the jump in stock price is only temporary, the managers can attract new money and earn higher fees.
The practice, known as "marking the close" or "portfolio pumping," is a form of "window dressing"—a term for a variety of techniques employed by asset managers to make their results look better at the end of the quarter. Some forms of window dressing, such as selling losing stocks right before reporting quarter-end holdings to investors, are perfectly legal. But regulators say marking the close violates prohibitions on deceptive trading in the federal securities laws.
Why the shareholder rights crowd thinks that empowering these sort of traders would enhance corporate governance is a bit of a mystery to me. I don't think they bring squat to the table. Asking them to weigh in on corporate governance and empowering them to have more influence over corporate management is like asking gamblers and shady characters to run a business.