What is marking an auction price?

According to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, marking the close is the act of buying or selling a financial instrument deliberately, at the reference time of the trading session (e.g. opening, closing, settlement) in an effort to increase, to decrease or to maintain the reference price (e.g. opening price, closing price, settlement price) at a specific level.

Note that MAR uses the term 'marking the close' in a broad sense, comprising all forms of 'marking a reference price'. Here, I will focus on 'marking an auction price'.


Motives

The motives for marking an auction price are pretty much self-explanatory if we consider that an opening price can serve as a reference for the rest of the trading session (if the security is not traded continuously, it still may set a reference for the closing auction), while a closing price can serve as a reference for the subsequent trading day and for a wide of idiosyncratic purposes - e.g., the periodic valuation of a certain portfolio or a derivative.

Examples of people that may have an incentive to perform this type of manipulation include the following:

• Executives and other employees that have their bonuses linked to the company’s stock price
• Holders of derivatives that are related to the company’s stock price
• Portfolio managers that bought (or short sold) that stock
• Financial advisers that have recommended to buy or sell such stock
• Shareholders of the company that may be desperately trying to move the price higher

Note that, for all of these cases, it is all a matter of relative importance between the gain and the loss (and risks of losing) coming from manipulating the price. For example, a CEO of a company may be willing to buy shares at the opening and/or closing auctions at unfavorable prices (while also facing the risk of being caught by the authorities) if such losses and risks are lower than the extra bonus he/she will get from the price increase that he/she artificially triggered.

How it works

The more evident scenario would be one in which the manipulator places an order (or a set of orders), right before the end of the auction's accumulation period, to trade relatively large quantities at the market price. This way, the manipulator can change the theoretical auction price, while giving a very limited time frame for the other market participants adjust their orders.

There are of course other ways to mark an auction price... It is even possible to do it without making any trade - by cancelling or modifying orders right before the end of the auction's order accumulation period (cancelling sell orders may bring the price upwards, and vice-versa).