Profitability and herding of trade-based pump-and-dump manipulation

ABSTRACT

We use the Korea Stock Exchange’s complete intraday order and trade data in a dataset that identifies individual accounts to examine whether trade-based pump-and-dump manipulators can trade profitably and whether other investors herd after the manipulation. The results show that other investors place more buy orders on stocks with higher manipulative buying volume and that more new investors buy such stocks. We also find that the trade-based pump-and-dump manipulation is profitable on average, both gross and net of transaction costs. Manipulators who have higher trading volume, more experience with manipulation, and less frequent transactions are likely to achieve larger profits. We also find that this type of manipulation is far more pervasive in the emerging market.

KEYWORDS:

• Trade-based manipulation
• pump-and-dump
• profitability
• herding
• trade-level data

JEL CLASSIFICATION:

• G11
• G12
• C14

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ A small number of studies examine manipulation cases like corners (Allen, Litov, and Mei 2006), closing price manipulation (Comerton-Forde and Putniņš 2011), squeezes (Jegadeesh 1993; Jordan and Jordan 1996; Merrick, Naik, and Yadav 2005), the stock pools of the 1920s (Jiang, Mahoney, and Mei 2005; Mahoney 1999), and spoofing order (Lee, Eom, and Park 2013).

² There are several studies on the pump-and-dump manipulations in cryptocurrency markets, for example, Kamps and Kleinberg (2018), Morgia et al. (2021), Dhawan and Putniņš (2021), and Li, Shin, and Wang (2022). However, their manipulative strategies are not trade-based, but information-based using the Internet.

³ Aggarwal and Wu (2006) find that, in their sample of prosecuted cases, stocks generally experience a price increase during the manipulation period, a subsequent decrease during the post-manipulation period, and increased volatility. Their sample of cases is concentrated in illiquid stocks and most of the manipulation is conducted by informed insiders like management, substantial shareholders, market-makers or brokers.

⁴ The transaction taxes and fees on the KRX are 0.3% (only for selling) and 0.0054% (for selling or buying). In general, trading fees charged by securities companies in Korea are 0.01 ~ 0.015% on HTS or MTS. We assume trading fees of 0.03% (0.015% for selling or buying) and total transaction costs of 0.3408% round trip.