[Infowarrior] - Spam Works: Evidence from Stock Touts and Corresponding Market Activity

[Richard Forno]

(c/o DG)

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 December 16, 2006

Harvard Public Law Working Paper No. 135
Oxford Legal Studies Research Paper No. 43/2006
Berkman Center Research Publication No. 2006-11
      
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=920553
      
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
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 ³buy low and spam
high,² 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

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=920553