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SEC Halts Trading on Spam Driven Stocks
goombah99 writes "The SEC has taken action to halt transactions on spam-touted stocks. Presumably this opens an opportunity for denial of service attacks on stocks. However, to be effective spam generally must target penny stocks with historically low volumes and thus the actual capitalized market impact or effect on the companies for a temporary shutdown can be expected to be negligible and transient. One example was given of a touted apparel stock jumping from 6 cents to 45 cents over a period of days before settling down to ten cents a share and near 65,000 or about $6500 in transactions (an eighth of the peak share volume, and a 50th of the peak transaction value). In other words, the market distortion of a brief shutdown, even if it were a DOS attack, would be massively less than the integrated spam surge. The thing I found surprising was that for this to be an effective measure with human oversight then the number of such events must be relatively small in number. From the amount of spam I get I'd have guessed it was a tidal wave."
So it finally payed off that I forwarded all my spam to the SEC :-)
The current amount of stocks advertised by spam is human-manageable (see http://www.spamnation.info/stocks/ for a list of about 15 spamvertised symbols), and it will probably stay that way, because there are not that many companies that have the volume and the price such that spam will have an influence on the price; I think that is a very sensible solution for the spam-problem in that domain; I wish they could do something like that for medication-spam as well...
1) these are companies that can't get listed on regular exchanges. Either they're too new or small to afford the fees, or they don't have the financials that the exchanges require.
:) )
2) this is a big one: the market makers may not report every single transaction and every price change, or every minute or hour. You're used to seeing the market change, and having updated info pretty quickly after a trade. "Real time level 2 quotes" and all that. Guess what? These are thinly traded. Some report daily. Some report every couple of days. Some report weekly. Unless you check, you don't know. If you see stock trading for 5 cents one week and 25 cents the next week, you don't know if it really is going up, or if it went to 10 dollars in the middle of the week, and all the pumpers jumped, and 25 cents is the reported figure on the way back down. You just don't know.
Go here for some more information. Really. Don't think about these without being sure you know the risks.
(Also, I have to say, while the information I gave in #2 was deemed correct when I worked for a broker, I was never a licensed broker myself. So don't take my word for it still being completely true. I see that a company called pinksheets.com offers what they say are real time quotes now for dealers, but they're neither a NASD broker-dealer nor SEC-registered, so... who knows what that means? Ask your broker and do your own research. Be sure and ask your broker what it means when you try to sell "at market" on a pink sheet, too, if you're assuming you're going to be able to get out quickly
It's not very likely that the companies are completely innocent. All sorts of crap goes on. Often the entire company exists only to try to fleece unsophisticated investors.
The best scams are those that make the sucker think he's pulling a fast one. It doesn't work. The "smart" people trying to cash in on this lose.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id =920553
"Before brokerage fees, the average investor who buys a stock on the day it is most heavily touted and sells it 2 days after the touting ends will lose approximately 5.5%. For the top half of most thoroughly touted stocks, a spammer who buys at the ask price on the day before unleashing touts and sells at the bid price on the day his or her touting is the heaviest will, on average, earn 5.79%."
You think you can squeeze a profit while the spammer is cashing out and the price is falling, good luck. They know the game, you don't.
I'm confused. At what point do they get money out of that process? You said "They don't need to worry about transferring money out of the compromised brokerage accounts", but if they're just using the accounts to pump the stock then wouldn't they still leave a trail back to themselves since they would have needed to own the stock in one of their own accounts in the first place?
The authorities would just need to look at the owners of these stocks who owned the stock before the hype and then see who sold during the hype. One time would be a coincidence, but if they were found doing that more than once then it'd be awfully suspicious.
Cow Cube
The stocks involved typically have such low volume that they may not even trade at all some days. Once the IPO is complete, the CEO probably doesn't give a rat's ass if his or her stock gets halted for a few days.
You are allowed to short any stock you'd like. Problem is, those shares need to be borrowed from somewhere (typically, a hedge fund, mutual fund or pension fund). Since none of those sources are likely to have any holdings in your penny stock, there simply aren't any shares available to be borrowed. And if there were, rest assured, the spammers would have already acquired those lonng before sending out the first email.
They are generally stocks that are very difficult to short, as no one will 'loan you the shares'.
Nerd rage is the funniest rage.
A company's market capitalization affects it's ability to borrow money / obtain credit. What's the market cap of a company on which trading has been suspended?
"I'd rather be a lightning rod than a seismometer." -Ken Kesey
Short of some organised crime indictment, The Feds won't get involved as the individual amounts are so damn small.
From TFA:
Also, from TFA:
Someone cynical might conclude, rather than being sensitive to suckers, er, investors losing their money, perhaps Cox got fed up with penny stock spam in his inbox, picked up the phone, and next thing you know, Schonfeld halted trading and issued a press release.
It remains to be seen if they'll actually find and shut down these scammers.
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