Email Stock Touts: Parting Fools from Their Money

In “Spam Works: Evidence from Stock Touts and Corresponding Market Activity”, Laura L. Frieder (Purdue) and Jonathon Zittrain (Harvard Law School) examined the price fluctuations of stocks promoted in unsolicited “hot tips” emails sent during 2004 and 2005.  They found that stocks experience a significantly positive return on days prior to heavy touting via spam.  Their evidence also indicates that volume of trading responds positively and significantly to heavy touting.  For example, for a stock that is touted at some point in their sample period, the probability of it being the most actively traded stock in the 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 authors’ analysis is consistent with their hypothesis that spammers “buy low and spam high”, purchasing penny stocks with comparatively low liquidity, then touting them in order to increase or maintain trading activity and price enough to unload their positions at a profit.  More sophisticated spammers will tout stocks immediately after an independently occurring upward price tick, or after having caused the uptick themselves by engaging in preparatory purchasing.

According to the paper, 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 5.48% (exclusive of brokerage fees).  By contrast, an average gain of 5.79% can accrue to the spammer who buys at the ask price on the day before unleashing touts and sells at the bid price on the day the touting is heaviest.

Not content with the statistical analysis, the authors go on to propose additional regulatory steps that might curb the influence of spam-based stock touts.  All the while acknowledging, of course, the recipients’ get-rich-quick gullibility which is key to the spammers’ success.