Penny Stock analysis

Posted by Nick Loadholtes on November 30th, 2006 filed in Probability, Statistics, Thinking, analytics

The stock market is one of those things that really intrigues me. An open system where everyone can see what’s going on, perhaps make some money, and perhaps influence the direction of the stock. Its a system that is ripe for data mining, something that seems to be equal parts analytical skill, part fortune teller, part industry expert, and often times being plain lucky.

I’ve talked with Hip Egg and Jym Khana about stocks before and one topic that I bring up every now and then are penny stocks. As I’m sure most people with an email account know, there’s a ton of stock related spam going around these days. Most of it appears to be the pump-and-dump variety in which the scammers hope that people will purchase the suggested stock causing the price to rise so that they can sell their shares (that they purchased before sending out the email) at an inflated price. This technique has been around for ever, but it seems to the flavor of the month for scam and con artists.

The main questions that we usually talk about are a)Does any one actually get rich doing this? and b)Just how “influence-able” are these low priced stocks? Well, today has been a banner day for answers, I came across two articles talking about the scams:

• Stock Spam Effectiveness Monitor (via Joel)
• Spammers as scammers
• Stock Touts and Corresponding Market Activity

While reading these I saw the simplest idea yet to help stop those spams: Simply watch the stocks and see who bought a lot of stock before the email was sent, and who sold a lot right around the sell date in the email.

That idea is pure genius. It targets a potentially large group of people, but the probabilities are that a pattern will emerge that a small group of people are moving from one stock to another. At a minimum those groups would be a starting point for a fraud investigation. More than likely, those would be the people responsible for sending out the emails. And since the spammers are kind enough to send these messages to just about everyone on the planet, it shouldn’t take too long to gather a nice body of evidence (or actionable intelligence). From what I understand in the past scams like this have been hard to track because the scammers can move quickly. But now that they are announcing their moves in advance, it should be pretty easy to set up a system to monitor spams, then watch the stock activity… It just seems so simple, that it should work like a champ!