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Spam Works: Evidence from Stock Touts and Corresponding Market Activity

LAURA FRIEDER
Purdue University - Krannert School of Management
JONATHAN ZITTRAIN
University of Oxford - Oxford Internet Institute; Harvard Law School; University of Oxford - Faculty of Law
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January 21, 2007

Harvard Public Law Working Paper No. 135
Oxford Legal Studies Research Paper No. 43/2006
Berkman Center Research Publication No. 2006-11


Abstract:
We assess the impact of spam that touts stocks upon the trading activity of those stocks and sketch how profitable such spamming might be for spammers and how harmful it is to those who heed advice in stock-touting e-mails. We find convincing evidence that stock prices are being successfully manipulated through spam. 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. 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.

The evidence accords with a hypothesis that spammers “buy low and spam high,” purchasing penny stocks with comparatively low liquidity, then touting them - perhaps immediately after an independently occurring upward tick in price, or after having caused the uptick themselves by engaging in preparatory purchasing - in order to increase or maintain trading activity and price enough to unload their positions at a profit. Selling by the spammer then results in negative returns following touting. 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%.


Keywords: spam, stock, tout, markets, e-mail, Internet, cyberlaw, SEC, unsolicited, commercial, manipulation, timing, consumer protection

JEL Classifications: C80, C81, D18, D52, D8, G1, G12, G14, G18, G28, L1

Working Paper Series

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Suggested Citation
Frieder, Laura and Zittrain, Jonathan, "Spam Works: Evidence from Stock Touts and Corresponding Market Activity" (January 21, 2007). Berkman Center Research Publication No. 2006-11 Available at SSRN: http://ssrn.com/abstract=920553

http://papers.ssrn.com/sol3/papers.cfm?abstract-id=920553