Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Tape Shredding

What it is:

Tape shredding occurs when a broker splits a large buy or sell order into a lot of smaller buy or sell orders.

How it works (Example):

Let's say Company XYZ is a huge pension fund with billions of dollars under management. It wants to buy 500,000 shares of Company ABC, but not all at once -- doing that would create a buying frenzy in the market for the shares and drive the price above what Company XYZ wants to pay for the shares.

Accordingly, Company XYZ's broker shreds the tape by placing a long series of 10,000 buy orders for Company ABC shares. These orders are easier to fill as well.

Why it Matters:

Shredding the tape can speed up a broker's ability to fill orders, and it sometimes generates more commissions for those brokers. Accordingly, clients who place orders should be clear ahead of time about how exactly the broker plans to fulfill the order. Tape shredding is generally legal, but regulators become very interested if the technique is used for more than just order execution.