What Is Tape Shredding?
In finance, the term "tape shredding" refers to the practice of executing a single purchase or sale order using a series of smaller transactions.
The term originates from before the adoption of fully computerized trading platforms, when brokers used to receive their trade orders on printed composite tape, also known as ticker tape.
- Tape shredding is the practice of breaking up large orders into several smaller orders.
- It was common among human brokers prior to the computerization of most trade execution activities.
- In the past, tape shredding could be used for both benign and nefarious purposes.
Understanding Tape Shredding
Tape shredding is the practice of dividing a single purchase or sale order into a series of smaller orders. Historically, brokers would do so when they believed that it would allow them to fill the entire order more quickly. Today, however, this practice has mostly disappeared as the vast majority of trades are now executed by computers.
Although tape shredding by human brokers is now a rarity, the underlying concept of tape shredding continues to be widely used. In fact, computers now routinely break up electronic trade orders into several smaller transactions in order to obtain the most efficient possible execution for the market participants involved.
While computerized tape shredding is viewed as a logical and uncontroversial trade execution strategy, unscrupulous human brokers sometimes used the technique to benefit themselves at the expense of their clients. Because brokers are often compensated for each order they fill, unethical brokers would sometimes split up large orders into several smaller orders, simply for the sake of generating additional commissions. Because the computerized trading platforms function for the benefit of all market participants rather than specific clients, this type of activity rarely if ever occurs today.
Real World Example of Tape Shredding
Before electronic trade execution became commonplace, human brokers would receive their clients' orders on physical machines that would print those orders on composite tape. These records were nicknamed "ticker tape" because of the ticking sound made by the machines that printed them.
Although these machines are no longer used, we see their influence in various terms, such as "tape shredding," "ticker tape," and "ticker symbol." For instance, we still use the term "ticker tape" to refer to the horizontally scrolling band of stock prices that are often featured in stock exchanges and in financial media. Similarly, the term "ticker symbol" is still used to refer to the codes denoting different stocks, such as "FB" for Facebook (FB) or "TSLA" for Tesla (TSLA).