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9/12/2006
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Buy Low, Spam High

Spam works.  This may come as a surprise to you, but not only do people read spam e-mail messages but, when it comes to the ones that tout a stock, promising riches and urging the immediate purchase of the stock, recipients of such messages act on them in sufficient quantity so as to impact the pricing of a said stock. 

 In a Basex report  in 2003, we noted that spam e-mail, which at the time accounted for ca. 50% of all e-mail traffic, cost businesses in the aggregate $20 billion annually in lost productivity, clogged e-mail systems, bandwidth consumed, and the money spent on deploying anti-spam software.  Today, spam is said to account for over 65% of e-mail traffic, which translates into some 730 million messages per week.  15% of these are stock touts.  As you might imagine, despite improved anti-spam measures, spam still takes a significant toll on the knowledge worker.  But for some, the cost might be even greater.

As much as spam is universally reviled, some portion of the population appears to be hungry enough for investing advice so as to read, absorb, and act upon advice that is delivered to them via spam.

This information comes from a new study, "Spam Works: Evidence From Stock Touts and Corresponding Market Activity"  by Laura L. Frieder, an assistant professor of finance at Purdue, and Jonathan L. Zittrain, professor of Internet governance and regulation at Oxford, pointing out that spam pays, at least for some.  

Data was compiled from reviewing all 26,273 pieces of spam e-mail accumulated in Prof. Zittrain's inbox between January 2004 and July 2005.  This was augmented with 1,775,743 reports of spam e-mail received by the Internet Usenet newsgroup net.admin.network.abuse.sights ("NANAS") over the same period.  The study identified 631 likely touts from Zittrain's inbox and 74,784 likely touts from NANAS, concerning 307 Pink Sheet stocks.  

Such spam is not only sent out directly by the spammer, but also by zombies, or virus-infected computers tapped to send spam.  

On average, a touted stock gained 4.6% more than other similar issues on the trading day just before the spam's peak volume day.  After the peak volume day, the return was 5.9% lower.

Stock-touting spam requires action on the part of a recipient far beyond clicking on a link.  After opening and reading the message, the recipient needs to issue instructions to a broker to purchase the touted stock.

Many of the stock-touting e-mails do contain disclosures that the sender would sell his own shares contemporaneously with the spam campaign, perhaps proving that such disclosures are ignored by many.  The researchers conclude that unscrupulous traders are able to make a tidy profit by buying shares prior to their spam e-mail campaign and then selling as the stock price increases due to investor activity generated by the spam.  Investors who purchase shares usually experience a considerable loss.

Unwanted spam? For the vast majority, yes.  But as long as some people continue to act on spam, it will remain a scourge of the knowledge age.

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