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Wednesday 8 September 2010


Choking on Spam

Spam is a habitual hazard of publishing your email address. Sadly if you don’t tell anyone how to contact you won’t get contacted, so spam is an unfortunate reality of life. However, spammers aren’t jamming up our inboxes for the fun of it, they’re pursuing a business model with measurable success.

Of course spam isn’t simply an economic issue, it’s a problem for investors as well because so-called stock spam is surprisingly effective at manipulating markets. Micro-cap investors need to be careful that they don’t choke on the stuff.

Opportunities in a Mailbox

As most of us know, spam is out there working overtime – it’s certainly an occupational problem with running a blog. A non-scientific scan of the junk mail folder reveals that there appear to be a lot of people out there who think a fake watch will impress their friends or a fake degree will fool their employers. There also seems to be an awful lot of money floating around Africa which is mine for the asking, should I only provide the helpful interlocutor with the intimate details of my bank accounts.

What’s most curious, though, are the large number of mails that inform me that I can attract any women I want through the ingestion of drugs that will apparently do remarkable things to the size of my .. well, you can probably imagine. Leaving aside the fact that the sizes most women seem most concerned about are my bank account (small), hair (equally small), weight (hmm …) and the large but random assortment of children and animals that can generally be found hanging off my person, one’s left wondering exactly how this enhanced growth works in attraction terms. Most women don’t seem to possess X-ray vision and it’s unlikely that wandering around naked is going to attract me anything other than a gaol sentence. I’ll guarantee it won’t get me a date.

Profits in Spam

These musings on the efficacy of spam are not without economic import. It’s a useful rule of thumb that people don’t do things involving money without the potential for some gain, so it’s unsurprising that the studies done to date indicate that they can be extremely profitable. In Spamalytics: An Empirical Analysis of Spam Marketing Conversion the researchers set up their own spam campaign and observed:
“After 26 days and almost 350 million email messages, only 28 sales resulted – a conversion rate of well under 0.00001%. Of these all but one were for male-enhancement products and the average price was close to $100… Thus the total daily revenue attributable to [the] pharmacy campaign is likely closer to $7000”.
Although this sounds impressive, the reality is that the profit margins are likely to be very, very slim: indeed the researchers found that campaigns only made money if the spammers also ran the spam network – the technology responsible for generating and distributing the emails. In these circumstances it might be very profitable indeed. Unfortunately the economic consequences for the recipients is poor as the aggregate costs of people haveing to deal with the wretched stuff is huge.

Costly Externalities

In these cases, though, the business benefits to the spammers and the losses to the receivers are straightforward. We may not like the business model but it’s a side-effect – an externality – of the consequence of the benefits of email. Such spammers are simply using a very low-cost distribution network to peddle their dubious wares. This isn’t always the case, though, because stockmarket spammers have a rather different agenda.

Pump-and-dump stock spammers aim to drive up interest in small cap stocks – some legitimate businesses and some not – after they’ve bought or shorted said company. In these cases the money that they make is at the expense of other unwise and unwary investors. We can, of course, simply shrug our shoulders at this, after all if someone’s stupid enough to take the investment advice of an anonymous e-mailer they can’t expect a good outcome. Unfortunately, though, legitimate investors can caught up in this as well, as the value of their investments suddenly starts jitterbugging about.

Stock Spam

Bohme and Holz have looked at The Effect of Stock Spam on Financial Markets by observing the behaviour of pumped stocks in the markets and:
“Find evidence that spam message campaigns on average go along with a) an increase in trading activity of the cited stock, and b) positive cumulative abnormal returns shortly after the messages have been distributed. Hence we conclude that the business model for stock spam actually works”.
What the researchers couldn’t figure out from their study was how to disentangle the interactions of the various parties. Obviously the spammers and the na├»ve fools who invest play their full part but they also point out that there are a third group who may well have a role – intelligent investors who, on receipt of the spam, react to try and take advantage of the scam. It isn’t just dumb investors who push up the price, it’s smart ones too.

Manipulative Spam

So what kind of difference can the spammers make? Well, Frieder and Zittrain in Spam Works: Evidence from Stock Touts and Corresponding Market Activity find that the difference in whether a stock is being touted by spammers is really, really significant:
“On a day when no tout has been detected in our database, the likelihood of a touted stock being the most actively traded that day is only 6%. On the other hand, on days when there is touting activity, the probability of a touted stock being the single most actively traded stock is 81%”.
They also find that people who purchase the spammed stocks then suffer a 5.25% loss in the couple of days subsequent to the spamming. Unsurprisingly they also provide evidence that the price of touted stocks has risen in the days before the spam starts; presumably as the spammers accumulate stock ahead of the sting.

Microcap Madness

Spammers, or course, rely on reaching a broad cross-section of society and deal in thinly traded shares, often penny stocks, to achieve their aims. Because these stocks have low liquidity then relatively small amounts of money can move them quite rapidly, making them ideal targets for such scams – they don’t need huge numbers of people to respond to the temptation of making a quick buck in order to make a quick buck or even a quick million bucks.

As ever, such scams rely on the gullibility of some humans and, as ever, it’s a bit too simple to write such people off as simple minded idiots. As we saw in The Psychology of Scams the possibility of making a lot of money easily can do very strange things to the minds of even quite intelligent and financially savvy people. Spammers are not stupid and many of their mails aren’t straightforward propositions, often appearing to be genuine investment analysis advice that’s been misdirected.

Abusive Spam

And, of course, this is mostly legal because unlike boiler room operations where investors are being targeted with investment advice, usually illegally, in stock spam touting stings the spammers are relying on a much more powerful and simple tool: human psychology. Of course, sensible investors won’t invest on rumours with much more substance than an e-mail materialising out of the blue but it’s another warning about the dangers of those small-cap stocks. Not all price rises are good, and stock spam attacks can undermine markets for smaller companies who are blameless in this regard.

Legislating against such attacks, which can emanate from pretty much anywhere is hard, but legislating against human behaviour is even harder. Maybe for once this type of market abuse should be clamped down on: how hard can it be to automatically identify stock spam mails and temporarily halt trading in them? That’ll change the economics of stock spammers, overnight.

Related articles: Your Financial Horoscope, Putting Down the Credit Cards, The Psychology of Scams


  1. I am an investor in small and micro cap companies, and I've seen all sort of strange things, including out-right stock price manipulation.

    However, I don't waste two seconds worrying about it. So far as I can tell, none of these schemes have any effect on the value of the underlying asset. They may add price volatility, but any stock market investor, especially a micro-cap investor, should be prepared for that.

    That said, I look forward to the technological advance that allows me to email a punch to the face as a reply to some of the spam I receive.

  2. Spam manipulation is only the start of it. For instance, here is a fairly clear case of a type of manipulation called 'painting the tape'.

    Notice how the prevailing price by volume is much lower than the closing price, which mysteriously jumps up at the end of each day, making any price chart using closing price data look oh-so-much prettier.

  3. To be clear: to see the TIKRF manipulation, you will have to put the google chart on a close-up view, like 5 days.

    It will not show up on a longer time frame, which is, of course, the point.