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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 bet many or maybe even most of the people who start buying the stocks being spammed, buy them in the expectancy that the spamming will make the value of that stock rise.
;)
Thereby they reinforce this strange mafia way of making money and worst of all they make sure that loads of spam will keep on putting even more pressure on the internet.
The only sensible conclusion I am able to draw from this is that it probably will pay of to invest in the spam-filter companies
Really, this should be the easiest to crack. Someone has to take the money. Or some company which then turns it over to some person. The SEC should be busting these left and right.
I find it hard to believe someone can't track those who benefit from these crimes.
We have to request permission before we buy & sell pretty much any listed security, just to satisfy our internal compliance people who in turn have to report to The Feds.
So why on earth is it so hard for The Feds to track who purchases larges quantities of these securities before such solicitations are made, and who conveniently dump shortly before these same shares crash? After all, we're only talking 5% here! There must be large sums of money whizzing about...
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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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I consider it a distinct possibility that that is actually the end-game of these spams, and it will eventually kill them.
If a couple of people do what you describe, they will be feeding from the same trough as the image spammers, taking the same profits, scamming the same people. This will decrease the utility to the image spammers, because they'll be doing all the work but only getting some fraction of the gains. Eventually, they're likely to give up.
It's entirely possible this will settle into a steady-state of "no stock spam", since it will cease to be a big gain for any particular person and anybody can get in on the fun.
I'm in no hurry because even disregarding legality issues, some or all of these people will eventually be burned. But it might work for a bit.
I don't see why not - if it's been sent directly to millions of people's inboxes, how much more public can it be? All you'd have to do to cover yourself is document when you received the email, so you can prove that you only bought after the email went out.
You can't be guilty of insider trading if you have no connection to the company and no source of real inside information. This spam is never based on real inside info.
The problem with that, is that there's millions of middle-low class citizens in the world that are fully aware they will never have the things of thier dreams without taking a chance now & then.
Spam like that is successfull for the same reasons lotterys are successfull.
Not because people don't know, but because they're prone to greed.
Wanna fight ? Bend over, stick your head up your ass, and fight for air.
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?
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.
1. Announce to everyone that you own UNIX. Make sure to grab a lot of media attention.
2. Sue IBM for stealing your code. Make sure to grab a lot of media attention.
3. Sell off stocks after everyone else buys, but before anyone realizes that you don't actually have any evidence that IBM stole code.
4. Profit!
GLaDOS for President 2016! "Well here we are again. It's always such a pleasure." -- GLaDOS, 2011
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.
Spammers bought stocks days/weeks before they sent their spam. The spammer will sell you these stocks. You will help them to "leave" the market.Even if you manage to make any profits (and I seriously doubt you could...Because you will be the "top"), it will be thinner than these 5.00% of return. Their pump & dump lifecycle is extremely short. You have to be the source to enjoy any profit.
There are plenty of other ways to make better e-investment.
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Bradley Holt
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
So you're saying that someone should write a virus that installs Folding@Home on computers and sets CPU usage to the highest possible so that any other viruses on that computer are starved for CPU cycles?
Actually, that has a number of positive side effects:
1. The computer will be so slow that the user will have to realize that something is wrong with their system. A normal virus wouldn't monopolize the system because they don't want to alert the user. If they realize something is wrong then they'll either live with it or they'll fix it and perhaps learn something about security in the process.
2. The computer has a security hole in it (either a technical one or a human one), so they'll get infected eventually. Might as well have their computer being used to fold proteins for medical research rather than send out spam.
Where are the white hats when we need them?
Cow Cube
it'll go the way of nigerian spams.
You mean more common than ever?
I've had enough abrasive sigs. Kittens are cute and fuzzy.
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.
Perhaps the way to get these people is through IRS. It would seem a highly likely proposition that the people running these P&D schemes would not be paying tax. They would more than likely keep detailed records with a nice transactions trail from their brokers and banks as well. Should be a slam dunk if IRS gets in on the game.
Don't tailgate - the end is near!
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.
Much like cigarette tax money goes to health education, wouldn't it be great if lottery profits were required to go to statistics and finance education?
That said, all the people I know who p[l]ay the lottery claim to do it because the realization of the possibility of great wealth is entertaining enough that it is worth the expense, even if they never win.
A slashdotter who didn't build his own computer is like a Jedi who didn't build his own lightsaber.
On Friday, I got a stock spam, touting some unknown company, in my mail. Not my e-mail, but my PAPER mail. It looked like a much fancier version of a standard stock spam, with charts, graphs, and a huge disclaimer at the bottom saying that they were just promoters.
This isn't the first one of these I've gotten, either. I got a similar one a few months ago. I can't imagine that stock spam is worth mailing to people via USPS, but apparently somebody can.
That's all well and good and I mostly agree. But... I was the CEO of a public (Pink Sheets) company where I would get calls DAILY from people (and their lawyers) complaining about spam 'pump and dump' faxes and emails being sent to them. I can honestly say that I never knew anything about these spammings. Essentially what can happen is that one or more major shareholders decide to drop a few bucks to increase the value of their holdings. The company never knows but their name is tarnished. I learned the hard way that proving innocence (ie... not knowing nor endorsing) about a pump and dump scheme is almost impossible. Basically, don't assume that a spam email or fax is being sent from the company directly. While there are most definitely scam artists out there (especially on OTC and Pink Sheets!), there are also a lot of very honest businesses who are at the mercy of their less than honest shareholders.