Pump and dump blues
Why stock scammers are losing the game
Spammers seem to be having little luck pushing up prices of thinly traded stocks.
The idea of so-called "pump and dump" scams is to buy stock at low prices and then try to drum up excitement in order to inflate the price.
Penny stock promotions have tripled in the last few months, according to estimates. One internet security firm says stock-related spam already accounts for 15 per cent of all junk email, compared to less than one per cent two years ago.
"The observed increase in the volume of trading in penny stocks hyped in spam emails provides significant financial motivation for speculators to send this type of spam," Stephen Pao, vice president of security vendor Barracuda, said on Monday.
In most cases the companies themselves are not behind the scams. Some of these scams are believed to be related to professional Russian hackers running a botnet powered by tens of thousands of hijacked computers. Some fraudsters even gain access to legit logins on brokerage accounts to buy the penny stock they've artificially run-up.
In the beginning, it may have worked. Not too savvy investors believed they'd stumbled onto some secret they could exploit for money, even though people who buy into penny stock scams typically lose 25 per cent to 40 per cent of the investment's initial value.
Based on a large sample of touted stocks listed on the Pink Sheets quotation system, UK researchers Laura Frieder and Jonathan Zittrain found that stocks experience a significantly positive return on days prior to heavy touting via spam.
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 per cent.
But these days, there are so many stock scam mails they seem to have lost their appeal. With dozens of "hot tips" it is difficult to pick a winner. Spammers may have diluted their own market.
We carefully watched a couple of stocks touted in penny stock promotions in the past couple of days, and the pattern is almost the same with every penny stock.
Stock of Red Reef Laboratories (RREF) would ride to $0.40, but actually dropped 25 per cent. Stocks of The Motion Picture Group (MPRG) and Goldmark Industries didn't move at all, despite heavy touting. Cana Petroleum (CNPM) was also set to bring "huge gains", but climbed only a few per cent, surely not enough the cover the cost of brokerage fees and the actual spam run (estimated at a few thousand dollars per run).
Over the weekend another tidal wave of stock spam arrived. The Great American Food Chain (GAMN) would profit a 330 per cent gain, the spam promised, but instead the stock nosedived 11 per cent. Inflot Holdings Corp gained only 25 per cent, but still trades at just $0.01 Stellar Resources (SRRL) climbed five per cent to $0.90 from $0.85. You need a lot of volume to make money from such small gains.
There is another aspect the scammers forgot to realise: there may be millions of people willing to order Viagra from shady websites, but investors willing to make a habit of buying spammed stocks and losing money are certainly in short supply. ®