Stock spamming works

Sophos, a Massachusetts-based supplier of software for protecting companies and consumers from online threats, reported in July that 15 percent of all junk e-mail messages are now stock spam, up dramatically from less than 1 percent 18 months ago. Here’s a Technology Revew piece about some interesting research conducted by Jonathan Zittrain and a colleague. Excerpt:

Stock spam uses the classic “pump-and-dump” scheme. A spammer sends out a mass e-mail message touting a penny stock with low trading volume in hopes of convincing a handful of people to buy shares of it. If the spammer succeeds, the limited buying activity boosts the stock’s price and liquidity just long enough for the spammer to sell his own shares (or the shares of his client) at a profit. The stock subsequently plunges and those who bought it are usually hit with a loss.

In their study, Zittrain and co-author Laura Frieder, an assistant professor of finance at Purdue University in Indiana, sought to quantify the effectiveness of such campaigns. To do so, they analyzed more than 75,000 stock “touts” appearing in Zittrain’s e-mail inbox and a Usenet spam-sighting newsgroup between January 2004 and July 2005. The date and estimated size of each spam campaign was compared with the price and trading volume of the company shares being promoted over several days, including the day immediately preceding the campaign.

The researchers discovered that if a spammer bought a stock a day before beginning heavy touting, then sold the morning after the first day of touting, the average return on investment was 4.9 percent. And more effective spammers saw a 6 percent return.

On the other hand, if a victim were to invest $1,000 in a stock on the day of heaviest touting, that investment would be worth, on average, $947.50 in the two days following the spamming campaign. For the most heavily touted stocks, the same investment would fall by 7 percent, to $930. The study also confirmed that the volume of touted stocks responded “positively and significantly” to touting campaigns, meaning that trading activity increased.

“Our analysis shows that [stock] spam works,” wrote Zittrain and Frieder. “Among its millions of recipients are not only those who read it, but who also act upon it, suggesting a value to spamming that will create a powerful counterbalance to regulatory and technical efforts to contain it.”