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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.'"
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.
>> 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
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> 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