Freezing Spam-Pumped Stocks Maybe Not Such a Good Idea

You’ve seen the spam. It’s some of the most insidious, and some of the most profitable. Con artists blast emails around the world touting a “hot tip” on some worthless stock that they’ve purchased. The laws of probability mean that some idiots out there will fall for the scam and buy the stock. After the price has been run up sufficiently, they dump the stock. The scammer makes a tidy profit, and the dummy is stuck with a worthless stock. There’s a sucker born every minute.

Now, the SEC is looking to take the incentive out of the practice by freezing trading on stocks targeted by such spam. It’s being hailed as a brilliant move across the Intertubes. Most notable is Google’s very public endorsement of the plan. If the SEC starts cracking down on these scams, then maybe they’ll stop spamming!

Stop a minute, though, and take a step back from the seething rage you feel for the crap in your inbox. There are a couple of negatives to this plan that deserve scrutiny.

First, the SEC is making themselves inadvertent accomplices to blackmail. If the SEC consistently shuts down trading on spammed companies’ stocks, then it is only a matter of time before spammers extort honest companies under threat of falling beneath the SEC’s hammer. Remember: These scams usually involve small companies which are not traded on major exchanges. These little guys are probably not in a position to fight the SEC, and may very well pony up to avoid further damage to their company. At least in the current scenario, the sucker is the one losing out. With the new scheme, it becomes possible to zero in on a helpless target.

Second, in response to the SEC’s move, it seems quite likely the spammers will execute a classic risk-distribution strategy: diversify, diversify, diversify. Spam is ridiculously easy to send out, and just as inexpensive. The criminals here can easily spread their penny holdings around much more than they already are, and then spam a much broader range of companies. In theory, they could pump a thousand companies’ stocks one week, and target another thousand the next. The SEC cannot hope to keep up with a flood of that kind, and the companies and markets won’t bear that type of interference for long.

In short, this entire idea is destined for failure. We’ve known for a long time that the solution to spam is simple economics. If you remove the profitable endpoint from the scenario, the spam will stop. Unfortunately, it’s impossible remove the profit from stock pump spams. We’ll have to find another way.

(Photos modified from the originals (Mail and we’ve got mail) by GoldenEel and anna banana, respectively; used and redistributed under a CC BY 2.0 license and a CC BY-SA license, respectively.)