What is Tape Shredding
Tape shredding is a term used to describe when a broker divides an order for securities into a number of smaller orders. For certain securities, smaller orders can be easier to fill, so brokers have the ability to tape shred when they believe that doing so will speed up the rate at which the order is filled.
BREAKING DOWN Tape Shredding
Allowing tape shredding to happen also opens the doors for unscrupulous brokers to split a large order into many small orders for the sake of generating extra commissions, given brokers are often compensated for each order they fill.
However, various self-regulatory organizations and stock exchanges have limited tape shredding to only apply for order execution purposes. The use of tape shredding for other reasons could have serious consequences.
Because securities markets are largely electronic today, there is generally little valid reason for an order to be broken into smaller pieces, as this is a standard and automatic feature of modern transactions. For the most part, all but for a handful of prime brokers today, tape shredding is a thing of the past.
Even the use of the term "tape" has been largely phased out. Before electronic data reporting services were real-time and widespread, the tape referred to a service that reported the prices and sizes of transactions on major exchanges. The expression was also known as the composite tape or ticker tape, named for the ticking sound made by the machines that printed the tape before the process was computerized.