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«Abstract Internet message boards are often used to spread information in order to manipulate financial markets. Although this hypothesis is ...»

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The Impact of Manipulation in Internet Stock Message


Jean-Yves Delort∗,a,b, Bavani Arunasalama, Maria Milosavljevica, Henry



Capital Markets CRC Limited, Sydney, NSW 2001, Australia


Department of Computing, Macquarie University, Sydney, NSW 2109, Australia


Discipline of Finance, Faculty of Business and Economics,

University of Sydney, Sydney, NSW 2006, Australia


Internet message boards are often used to spread information in order

to manipulate financial markets. Although this hypothesis is supported by many cases reported in the literature and in the media, the real impact of manipulation in online forums on financial markets remains an open question. This work analyses the effect of manipulation in internet stock message boards on financial markets. We employ a unique corpus of moderated messages to investigate market manipulation. Internet message boards administrators use the process of moderation to restrict market manipulation.

From the data we find that manual supervision of stock message boards by moderators does not effectively protect users against manipulation. Furthermore, by focusing on messages that have been moderated as manipulative due to ramping we show that ramping is positively related to market returns, volatility and volume. We also demonstrate that stocks with higher turnover, lower price level, lower market capitalization and higher volatility are more common targets of ramping.

Key words: Ramping, Market Manipulation, Internet Stock Message Boards, Event Study JEL classication: D.82; G.14; G.22 ∗ Corresponding author Email addresses: jydelort@cmcrc.com (Jean-Yves Delort), bavani@cmcrc.com (Bavani Arunasalam), maria@cmcrc.com (Maria Milosavljevic), henry@cmcrc.com (Henry Leung) Preprint submitted to Elsevier October 30, 2009 Electronic copy available at: http://ssrn.com/abstract=1497883

1. Introduction Internet stock message boards provide an effective medium for investors to communicate, to disseminate and discover new information. However, the value and integrity of internet stock message boards are often criticised and investors are warned not to trade on the information provided (Fraser, 2007).

In order to address these issues, regulators often dictate that message board providers conform to specific guidelines1. Nevertheless, people continue to use forums for their own purposes, and financial surveillance analysts at regulators and exchanges are known to use message boards for investigating suspicious trading activities.

HotCopper2 is the most popular internet stock message board in Australia and forms the focus of our study. This site operates under a strict code of conductwhich prohibits unethical or illegal use of the forum. Administrators moderate posts which do not conform to the guidelines and can revoke access for users who consistently disregard the rules. Moderated posts are labeled with the reason for moderation, for example ramping, flaming or profanity. These posts serve to proxy manipulative behaviour. Using an event study methodology, we investigate whether ramping is related to stock price volatility, trade volume and returns. Further, we study the firm characteristics targeted by rampers.

We first find that manual moderation of messages cannot effectively prevent ramping to take place in internet stock messages. This result is supported by the high number of posts that are moderated due to ramping every day which indicates that ramping is a common phenomenon. In addition, we find that the lead time to moderation is approximately 8 hours, allowing sufficient time for these posts to impact the market. Our results also demonstrate that ramping is positively related to market returns, volatility and volume. Firms with higher turnover, lower price level, lower market capitalization and higher volatility also receive a higher proportion of ramping posts suggesting that they are more common targets of ramping.

The remainder of this study is organised as follows. In Section 2 we For example, in Australia, see Australian Securities & Investments Commission (ASIC) Regulatory Guide 162, http://www.asic.gov.au http://www.hotcopper.com.au Electronic copy available at: http://ssrn.com/abstract=1497883 present an overview of previous work. This serves as motivation for the development of our hypotheses in Section 3. In Section 4 we describe the data and empirical methodology used in our analysis. The results are reported and discussed in Section 5, and Section 6 concludes and provides some areas for further work.

2. Literature review Stock market manipulation is generally defined as the creation and exploitation of arbitrage opportunities (Zigrand, 2006). Manipulation of stock prices may occur through direct trading strategies or indirectly via the dissemination of distorted price sensitive information. The former may be observed when trades are intentionally placed in the wrong direction or short term losses are being undertaken to move prices in the desired direction (Chakraborty and Ylmaz, 2004). The latter may occur through mediums such as investment blogs, spam emails and online stock message forums (Antweiler and Frank, 2004; Das and Sisk, 2005; Aggarwal and Wu, 2006).

However, the detection of both types of manipulative behaviour remains difcult due to the lack of proxy for the occurrence of manipulation.

The impact of trade strategy manipulation can be observed in the market response to such strategies. For example, Aggarwal and Wu (2006) demonstrate that stock market manipulation cases pursued by the U.S. Securities and Exchange Commission (SEC) from January 1990 through October 2001 were associated with greater stock volatility, greater liquidity and higher returns. Other evidence of stock market reaction to manipulation is documented by Hillion and Suominen (2004), who highlight a general rise in volatility, trading volume and one-minute returns in the closing price of Paris Bourse stocks between January and April, 1995. Further, the proportion of partially hidden orders increased during this period.

Evidence of manipulation has also been found in certain types of derivatives markets such as the futures market. It is shown that uninformed investors earn positive profits by creating a futures position and simultaneously trading in the spot market. As a result, arbitrage free profit opportunities are exploited to derive profitable cash settlement at the time of delivery (Kumar and Seppi, 1992; Merrick et al., 2005).

Additional evidence of trade strategy manipulation include those found by Guo et al. (2008), who uses low earnings quality firms to proxy for firms’ intention to manipulate. They find that these firms tend to use stock splits to manipulate equity values before acquisition announcements. On the other hand, Eom et al. (2009) find that investors strategically place spoofing intraday orders in the Korean Exchange. Spoofing orders have little chance of being executed and are used to mislead other traders of an order book imbalance and thereby influence the direction of stock price movement. They conclude that stocks targeted for manipulation had higher return volatility, lower market capitalization, lower price level, and lower managerial transparency. Finally, large traders have also been found to carry out manipulation due to its scale of operation and its ability to better sequence and time trades (Gastineau and Jarrow, 1991; Allen et al., 2006).

Manipulative behaviour involving the intentional mis-interpretation and dissemination of price sensitive information is more difficult to document.

Bagnoli and Lipman Bagnoli and Lipman (1996) address the problem of market manipulation through the announcement of a takeover bid. They develop a model where the manipulator takes a position, announces a takeover bid, and then unwinds his position. In their attempt to elucidate market manipulation from the 1600s to the internet technology frauds of today, Leinweber and Madhavan (2001) show that through technology, information can be quickly disseminated to influence investor perception on particular stocks.

Stock spam emails and posting on internet message boards are two major avenues manipulators can affect investor sentiment because of their global reach and high degree of accessibility to investors. In particular, significant reactions of trading volume and returns have been shown to respond to spam campaigns (Bohme and Holz, 2006). Hanke and Hauser (2008) then extends the works of Leinweber and Madhavan (2001) and Bohme and Holz (2006) to provide corroborating evidence that stock spam e-mails significantly and positively impact volatility and intraday spread. Similar evidence is noted by Hu et al. (2009), who found that pump and dump email campaigns show a statistically significant decline in stock price from the peak spam day to the following day.

Evidence of online message board posts’ impact on stock activity is well documented in prior literature (Antweiler and Frank (2004); Das and Sisk (2005); Aggarwal and Wu (2006); Cook and Lu (2009)). Antweiler and Frank (2004) use computational linguistics methods to analyze the effect of message sentiment (buy, sell or hold) in forums to determine whether the information content of posts influence the stock market. They find that stock messages help predict volatility and disagreement between messages to be associated with increased trading volume. However, they find no correlation of message sentiments with the direction of returns. By improving sample selection and removing noise caused by program generated sentiments, Cook and Xu (Cook and Lu, 2009) find that the bullishness of board messages positively and significantly predict abnormal stock return up to 2 days ahead. When taking poster’s credibility into account, they also find that the board messages’ predictive power over stock returns becomes much stronger in terms of both economic magnitude and significance. These studies demonstrate that stock markets are likely to be sensitive to internet message board activities. Moreover, many anecdotal evidences of market manipulation in Internet stock message boards have been reported in the financial literature and in the media (Leinweber and Madhavan, 2001; Harris, 2002). However, the phenomenon has not been investigated through a rigorous approach. To the best of our knowledge, this work provides the first quantitative analysis of market manipulation in Internet stock message boards.

3. Hypotheses development This paper employs moderated posts unique to the Australian HotCopper online message forum. Improving upon prior literature such as Das and Sisk (2005), Chemmanur and Yan (2009) and Brown and Cliff (2004), HotCopper moderated posts allow us to proxy for manipulative behaviour directly.

Stock ramping through forums occurs when a ramper recommends a stock and highlights its huge potential to rise in share price in the very near future.

The ramper buys a large quantity of a stock, and posts to influence the masses in to buying the stock with the aim to drive up the share price. By implying that readers of these posts are in possession of privileged information - such as insider knowledge of an impending takeover offer - rampers seek to persuade the gullible into purchasing a particular stock. If a significant enough number of easily-led individuals invest in the touted stock, a ramper can “ramp up” the share price so that he or she could sell their shares at a quick profit.

Ramping can be both up or down.

Stock message board administrators use the moderation process to restrict the manipulations of stock prices through ramping posts. However, the wide accessibility of internet technology and the high speed at which investors absorb news may diminish the effect of moderation. Therefore we

want to test the following hypothesis:

Hypothesis 1. Manual moderation of stock message boards, as a monitoring strategy, does not protect users against manipulation.

The direct measure of ramping through HotCopper moderated posts allow to investigate the impact of ramping on stock market activity. It has been shown in the literature that well advertised stocks are related to higher stock returns (Das and Sisk, 2005; Chemmanur and Yan, 2009; Brown and Cliff, 2004). Based on the investor attention hypothesis proposed in Chemmanur and Yan (2009) which implies that high levels of stock advertising is associated with larger stock returns, stocks heavily promoted to investors via ramping posts may also generate higher returns. One possible explanation proposed by Barber and Odean (2008) may be investors’ need to select stocks out of the many available and ones that attract their attention will be the ones most likely to be included in their investment portfolio.

Furthermore, extreme news announcements have been shown to produce high trade volume (Tetlock, 2007). Similarly, ramping posts, as a type of extreme news announcements, may potentially have the same effect. Both stock spam e-mails and online message forum messages rely on the internet technology to increase its reach to investors (Leinweber and Madhavan, 2001).

Drawing upon the works of (Bohme and Holz, 2006; Hanke and Hauser, 2008; Hu et al., 2009) on the impact of stock spam e-mails on trade volatility and intraday spread, we hypothesize that manipulators may employ online message forum message ramping to influence investor sentiment in a similar fashion. If ramping posts does indeed have an impact on investor sentiment prior moderation, we may form the following hypothesis to test the relation

between moderated ramping posts and stock market response:

Hypothesis 2. Ramping in internet stock message boards affects stock price volatility, volume and returns.

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