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Spam Works: Evidence from Stock Touts and Corresponding Market Activity
LAURA FRIEDER
Purdue University - Krannert School of Management
JONATHAN ZITTRAIN
Oxford Internet Institute; Harvard Law School; University of Oxford Faculty of Law
July 25, 2006
Abstract:
We assess the impact of stock touting via unsolicited email upon the stocks' trading activity, and sketch how profitable spamming might be for those who manipulate stocks via spam as well as how harmful it is to those who might heed advice in stock-touting e-mails. We suggest that the profitability of spammed stock touting calls for adjustments to securities regulation models that rely principally on the proper labeling of information and disclosure of conflicts of interest in order to protect consumers.
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 when they are heavily touted via spam, and on the day preceding such touting. Volume of trading also responds positively and significantly to heavy touting. Indeed, on a day when no tout has been detected in our database, the likelihood of a touted stock being the most actively traded stock 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%. 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. Selling by the spammer then results in negative returns following touting. Investors who respond to touting are losing, on average, 5.25% in the two day period following touting. For the quintile of stocks in our sample that are touted most heavily, this 2-day loss approaches 8%. These estimates are conservative, as they do not account for transaction costs.
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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
Suggested Citation
Frieder, Laura and Zittrain, Jonathan, "Spam Works: Evidence from Stock Touts and Corresponding Market Activity" (July 25, 2006). Available at SSRN: ssrn.com
Contact Information for JONATHAN ZITTRAIN (Contact Author)
Email address for JONATHAN ZITTRAIN
Oxford Internet Institute
Mansfield Road
Oxford OX1 3PG Oxfordshire
United Kingdom
+4401865287210 (Phone)
+16175880201 (Fax)
Email address for JONATHAN ZITTRAIN
Harvard Law School
Berkman Center for Internet & Society
Cambridge , MA 02138
United States
617-495-4643 (Phone)
617-495-7641 (Fax)
Email address for JONATHAN ZITTRAIN
University of Oxford Faculty of Law
St. Cross Building
St. Cross Road
Oxford OX1 3UL
United Kingdom
+4401865287210 (Phone)
+16175880201 (Fax)
Contact Information for LAURA FRIEDER
Email address for LAURA FRIEDER
Purdue University - Krannert School of Management
1310 Krannert Building
West Lafayette , IN 47907-1310
United States
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