If you use email with any frequency, you have probably by now received stock-related spam. Typical emails tout the astronomical profit potential of investing in a penny stock before its coming surge. Here’s an example from my own inbox, which I received on August 18th.

Do these emails have any real effect on the market? New research claims they do. Laura Frieder and Jonathan Zittrain compared a database of collected stock spam against historical market activity to examine the effects of spam on both market volume and price. They found that stock spam does make a significant impact on the market. From their abstract:

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.

For a nontechnical review of the paper, see Spammers Make a Sound Investment in Stocks. The original paper is here: Spam Works: Evidence from Stock Touts and Corresponding Market Activity.

It’s important to note that timing is everything when it comes to profit or loss from temporary market manipulations like these. The Spam Stock Tracker is a mock portfolio of penny stocks touted in spam received by the author. As of today, his portfolio has lost over $47,000 (on paper), based on an investment of $70,987.

Via kottke

UPDATE: Roger Ehrenberg at Information Arbitrage has an insightful post on the same topic: Stock Spamming for Profit – A Sucker Born Every Day