Buy Low, Spam High

2005 was the year of the oil company with many of these companies posting record profits. 2006 has been the year of alternative fuels with companies involved in this sector blowing off the charts.

This trend shows no signs of abating…

This is a small sample of the pump-and-dump spam I receive every day. It ends with a paragraph from a random CNN report, which I imagine was scraped by the bot that sent the message to evade Bayesian filters. No doubt this is familiar to most of us, since p&d spam accounts for about 15% of spam e-mail messages.

We get this spam because it must bilk some people, but how? I suspect many who get involved with these scams don’t believe the spam, but believe that others are foolish enough to con. In short, they are relying on their being smarter than their peers, who will take the loss, while they profit–this Lake Wobegone effect meets Ponzi scheme dynamic works reliably in favor of con artists, from Amway to Pump-and-Dumpers.

Consider one Slashdotter’s suggestion:

1) Get stock spam
2) See if the price has gone up in the past week. If so, forget it. If not, continue to step 3
3) Buy a few thousand shares
4) Watch the price carefully.
5) The second it starts going up, sell sell sell! Don’t try to time it for best profit, dump ASAP.
6) Profit!

Great algorithm, right? No.

The stocks used are pink sheet and over-the-counter (OTC) securities and shorting them is very difficult due to their illiquidity.

So, if profit cannot be made reliably by a latecomer to the scheme, how profitable are they for their initiators? According to a recent analysis, and they can be quite profitable in large volume:

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%. (from “Spam Works: Evidence from Stock Touts and Corresponding Market Activity”, Laura Frieder & Jonathan Zittrain)

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