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The Anatomy of Pump n' Dump Stock Spamming
giorgiofr writes "Laura Frieder and Jonathan Zittrain have analyzed pump n' dump spam activity in their paper 'Spam Works: Evidence from Stock Touts and Corresponding Market Activity'. Unbelievably, it appears that spammers are able to achieve a 5% gain on pumped stock before dumping it, along with a dramatic increase in transaction volume of the stock. From the synopsis: ' We suggest that the effectiveness of spammed stock touting calls into question prevailing models of securities regulation that rely principally on the proper labeling of information and disclosure of conflicts of interest to protect consumers, and we propose several regulatory and industry interventions. Based on a large sample of touted stocks listed on the Pink Sheets quotation system, we find that stocks experience a significantly positive return on days prior to heavy touting via spam. Volume of trading responds positively and significantly to heavy touting.'"
Correct in theory, but in practice you'd have to find someone willing to lend you the shares to short - after all, the definition of short selling is selling shares you don't own.
Most of these securities, traded on the Pink Sheets, are thinly traded at best. The secondary market is by no means liquid, at least what liquid means when we consider an NYSE or AMEX listed security.
So short selling, while the correct approach, wouldn't be viable in this market.
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Point taken about The Feds and efficiency, but also you've got to consider that there aren't any listed options for the Pink Sheet securities these pump'n'dump operators tout.
Seems like a losing game all around.
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It's the people who buy before the spam goes out and sell right after (probably even same day) that you would target. Only the people behind the spam have advance knowledge of when the pump is going to occur. Plus, anyone doing this is doing more than one, so there'll be a pattern of this activity proving it can't be a fluke.
While you are correct in a sense, you are very wrong. When you pump and dump, volume goes up and its VERY likely you can have a covered short with any of the major brokers because so many of their clients are believing the stock is actually undervalued (due to your pump'n'dump scheme). Covered shorts aren't a problem. Naked shorts would be an awesome thing to have, but are quite illegal ....
Except that you CANT short pink sheet stocks or OTC stocks. Do you even realize that YOUR level of misinformation is EXACTLY what these people are taking advantage of?
FBI's not doing that. That's the RIAA suing in a civil action.
-jcr
The only title of honor that a tyrant can grant is "Enemy of the State."
My experience is that the pumping emails are sent out after the market closes for the day, and usually on a Friday at that. They are counting on retail investors (read: in-duh-viduals) to place orders with their broker at night after getting home from work, or over the weekend. So, the pop on the next trading day is quite frequently an instantaneous "gap up", or happens within a matter of a few minutes. Good luck catching that wave.
And since the stocks being pumped are generally pink-sheet material, its tough to find shares available for borrowing, for the purpose of shorting. The pumpers intentionally pick illiquid stocks, because illiquidity (a) amplifies the effect of their pumping efforts, and (b) limits the ability of shorters to attenuate their pump & dump profits. (In this respect short sellers are like positive reactance in an AC circuit.)
HSJ$$*&#^!#+++ATH0
NO CARRIER
I doubt that you can sell short on OTC stocks. On the real market, being able to sell short is not something you can just "do". You need to have a broker that will loan you the stocks. (Selling short works by you saying, "loan me xxx shares of this stock and I'll give them back to you in a few days". You then sell them and then re-buy them at the lower price, and pocket the difference. Or lose massive amounts of money if the stock goes up.) To get the stock loaned to you, you have to have a brokerage account with the ability to buy on margin (and then you can only use a certain percentage of your margin to sell short). Then, you can only short-sell when the stock is not falling (which means you need to plan ahead; you can't just read about a company going bankrupt and then short 10000 shares of its stock).
So it's not just "sell short and profit", it's actually a difficult thing to do, and it's heavily regulated. I don't know how it works for OTC stocks though == if you get a friend to loan you the shares, then you could be all set.
Finally, 5% is a good one-day return (it's a good 6-month return, too), but you need to factor in how much it costs to trade. If it's $0.01 per share to buy (and the same to sell), and the share is priced at $0.03, then your 5% gain becomes a net loss.
So be careful with penny stocks. Your investment strategy is a great way to lose tons of money.
My other car is first.
There's a great page that tracks spammed stocks. While TFA shows that people who buy in before the touts start arriving make a 5-6% gain, the spammed stock tracker shows that once the spam starts showing up in inboxes, it's too late.
The guy's got records going back over 2 years. It's pretty interesting.
- Greg
Start a happiness pandemic
in reality, not trading for years is the key to making money - forget the dodgy, daytrading, low cap, high risk stocks, and stick to established ones that pay a decent dividend, have decent cover, forecast growth and you can just forget them for years.
As a perfect example, read this about a stock tipping newsletter
or, the Story of Doris, for further elucidation.
If you read your own link you will see the point the parent to your post was making. These stocks are often illiquid, so there is no pool of shares to borrow from and thus short selling is problematic, especially on the short time-frames relevant to such a scam. The poster wasn't saying that short selling of these securities was illegal, but that it was impracticable.
Spend a few bucks and see if you can get a short position on one of these pump and dump penny stocks in a reasonable period of time.
I have a friend who works for one of the big 5 accounting firms as a Financial Securities Auditor. The wife and I had dinner at his house last night. He was telling me that one of the biggest areas of securities fraud that he is seeing right now is the pump-n-dump scams. I thought I understood it all...
The Phishers will phish usernames and passwords for brokerage accounts, or they will collect the information from personal users by means of a trojan. The criminals log into these accounts and schedule sell orders for whatever stocks they are holding, and schedule buy orders for the penny stock they are going to pump-n-dump. Then they walk away.
They execute the spam, eager traders read the spam, look at the account and see that volume of shares purchased have been bought up in the past n-hours and they jump in. The pumpers have bought their stock before hand and once the volume peaks, they dump. The account holders whose accounts were compromised are left holding the pumped-dumped stock...
The criminals are getting GOOD! They don't need to worry about transferring money out of the compromised brokerage accounts, they are stealing the money and laundering it all in the same step.
The big targets for the brokerage account takeovers are in Tiawan, the targets for the spam are American "day traders". Apparently, the Tiawanese accounts are big targets because all the business deals in China are written according to Tiawanese law, and all securities trading is handled out of there.
And it should be no big suprise that the criminal organizations behind the whole operations is the Russians.
Good security is based upon reality and common sense. Common sense is a function of having common knowledge.
The spammers' profit is the other investors' loss. As TFA says, a spammer can make on average 5.79% by buying before the spam is sent and dumping on the rise; while those who buy on receiving the spam on average lose 5.5%. So people quite definitely are hurt, aside from all the chaos caused by the billions of spams.
>> 1) Get stock spam 2) See if the price has gone up in the past week. If so, forget it. If not, continue o step 3
>
> You could also short the stock at this point...
You've just sent anybody who understands stocks into gales of laughter. You don't understand how shorting a stock works. Shorting a stock requires that you borrow shares from a broker who has shares available to be borrowed. You then sell the shares and leave the money with the broker as collateral for the borrowed shares, plus a little more out of your own pocket as margin. If the stock goes up, you must supply the broker with more collateral money (that's called a margin call). When you decide to close out the short, or if you're forced to by a margin call when you don't want to come up with more cash, you buy the stock, give it to the broker to replace the borrowed shares, and reclaim your money. All this depends on a broker having shares he's willing to let you borrow. The chances of scam penny stocks like this being available to borrow from any broker is absolutely nil. These stocks simply cannot be shorted.
Chris Mattern
When you decide to close out the short, or if you're forced to by a margin call when you don't want to come up with more cash, you buy the stock, give it to the broker to replace the borrowed shares, and reclaim your money. All this depends on a broker having shares he's willing to let you borrow. The chances of scam penny stocks like this being available to borrow from any broker is absolutely nil. These stocks simply cannot be shorted.
Especially since the minimum share price to short a stock is $5, and the stock must be sold on an uptick regardless of share price.
Filter emails with a Message-Id header that contains the string "6c822ecf." Apparently the trojan/zombieware that sends this spew out has that string hardcoded as a part of the Message-Id it generates.
Thanks to the War on Drugs, it's easier to buy meth than it is to buy cold medicine!