Spam used for Penny Stocks Pump and Dump schemes

Over the last 8 months or so, there has been a noticeable rise in spam that touts certain penny stocks.

The scheme works like this:

• Certain criminal parties on the internet create bot nets. These are thousands of PCs that are commandeered remotely to do certain things (e.g. sending spam, performing a Distributed Denial of Service attack, ..etc.)
• Those parties advertise their services.
• Others who want to send spam hire the bot nets to send spam on their behalf.
• They send spam to millions of people.

In this scheme, the spam contains a stock ticker, and a claim that it will rise in price sharply on a certain date.

The companies that are the subject of the pump and dump scheme are normally unaware of what is going on. They are often a victim of this scheme.

It seems that this scheme does work, and some party benefits from it, otherwise spam would not continue to flow about it.

Now there are two academic papers specifically analyzing this scheme.

• Bohme and Holtz: The Effect of Stock Spam on Financial Markets, an academic paper from April 2006, trying to measure spam success in affecting stock price for penny stocks advertised via spam.
• Frieder and Zittrain: Spam works : Evidence from Stock touts and corresponding Market Activity, another academic paper from January 2007. They 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. For a stock that is touted at some point during our sample period, the probability of it being the most actively traded stock in our sample jumps from 4% on a day when there is no touting activity to 70% on a day when there is touting activity. Returns in the days following touting are significantly negative. They put out the thesis that spammers "buy low, spam high".

All I can say is beware ...

Resources

• Penny stock on Wikipedia.
• Pump and dump on Wikipedia.
• SEC on Internet investing scams and frauds.
• BBC: Spammers manipulate stock markets.
• Eweek: Pump and dump spam linked to Russian bot herders.
• The Register: Pump and dump blues claims that scammers have little success.
• The Register: Spammers get bullish on stocks recounts details for such a case.