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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 assume most will not read the paper, so here is a couple of points to consider before weighing into the discussion:
* The touting is not illegal in and of itself - most touters are even including disclosures about their own activities (it is, however, one of the authors' recommendations to nail some of them for breach of CAN-SPAM)
* These are not NASDAQ or NYSE stocks, and don't behave anything like that. Those are unknown, small stocks with very small trading volumes. The touter and the people he is fooling are often making up much of the trading activity in the period around the touting. They are also "penny" stocks, which "tick" in pretty large increments (percentagewise).
* Consequently, the only people likely to benefit or hurt are the touters and the people who bought into their messages (i.e. no "innocent bystanders")
It is unclear to me that this is a problem for the regulators, at least not from the point of view of protecting the "victims". After all, people are free to make bad choices and these are not fraud cases (the authors note that this is "investor irrationality"). There is, however, a negative impact on everyone else, because this sustains high spam levels. Probably the "CAN-SPAM direction" is the regulatory way to go, rather than something more specific related to touting of financial assets.
There is an old saying that goes caveat emptor - Let the Buyer Beware.
Mainly it's illegal because the rules prohibit it. Obviously there's no natural law that says that you can't pump-n-dump, just as there's no natural law governing any other game that we humans play.
The rule is in place simply because it makes the game fair, fun, and profitable. We could change it if we desired, if we all decided that we wanted our stock markets to be most profitable to spammers.
Fascism trolls keeping me up every night. When I starts a preachin', he HITS ME WITH HIS REICH!
I'm pretty sure it's much simpler than you think to figure out the "algorithm." I thought about this last fall, and looked at two stocks that made it through my filter. One had an approximately 8 day cycle and the other had something like a 17 day cycles. It wasn't exact, but over the previous 6 months it was pretty steady, every 6-10 days on the first stock and every 15-19 days on the other one. I didn't check it to a calendar all the way back, but it seemed the variation was due to weekends.
I seriously considered trying to beat the spammers, buy the day before they were buying, sell at the high.
That is until I talked to my attorney friend, who convinced me the risk wasn't worth it, that if you did get investigated for doing this, you'd have to work pretty damn hard to convince them that you had nothing to do with the Pump and Dump scheme, and that it was a grey area if you can profit off a pump and dump (even if you had nothing to do with it).
I still think it's a good idea.
Ryan Stultz