Spam Works: Evidence from Stock Touts and Corresponding Market Activity

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Spam Works: Evidence from Stock Touts and Corresponding Market Activity

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dc.contributor.author Frieder, Laura L.
dc.contributor.author Zittrain, Jonathan
dc.date.accessioned 2010-10-01T17:22:35Z
dc.date.issued 2007
dc.identifier.citation Laura Frieder and Jonathan Zittrain, Spam Works: Evidence from Stock Touts and Corresponding Market Activity, Berkman Center Research Publication No. 2006-11(2007), 13 Hastings Communications and Entertainment Law Journal 479 (2008). en_US
dc.identifier.uri http://nrs.harvard.edu/urn-3:HUL.InstRepos:4455162
dc.description.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 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 as means of protecting consumers, and we propose several regulatory and industry interventions. Based on a large sample of touted stocks listed on the Pink Sheets quotation system and a large sample of spam emails touting stocks, 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. We find that prolific spamming greatly affects the trading volume of a targeted stock, drumming up buyers to prevent the spammer's initial selling from depressing the stock's price. Subsequent selling by the spammer (or others) while this buying pressure subsides 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 close to 5.5%. For those touted stocks with above-average levels of touting, a spammer who buys on the day before unleashing touts and sells on the day his or her touting is the heaviest, on average, will earn 4.29% before transaction costs. The underlying data and interactive charts showing price and volume changes are also made available. en_US
dc.language.iso en_US en_US
dc.relation.isversionof http://cyber.law.harvard.edu/sites/cyber.law.harvard.edu/files/Spam%20Works.pdf en_US
dc.relation.isversionof http://heinonline.org.ezp-prod1.hul.harvard.edu/HOL/Page?collection=journals&handle=hein.journals/hascom30&id=497 en_US
dash.license LAA
dc.title Spam Works: Evidence from Stock Touts and Corresponding Market Activity en_US
dc.type Journal Article en_US
dc.description.version Accepted Manuscript en_US
dc.relation.journal Berkman Center Working Paper en_US
dash.depositing.author Zittrain, Jonathan
dc.date.available 2010-10-01T17:22:35Z

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