The corporate regulator said that more than 80 per cent of sharemarket traders who took part in organised social media pump and dump schemes “realised a financial loss or zero benefit” and collectively burnt about $6.3 million a month chasing over-hyped stocks.
In an extensive report into the pump and dump activities of micro-cap securities released late this week, the Australian Securities and Investments Commission said it was able to quickly intervene and disrupt misconduct in the smaller end of the market after identifying suspicious behaviour.
ASIC took the unprecedented step of posting on Telegram chat rooms to alert users they were being watched and possibly breaking the law, an intervention that it says has put the brakes on potential market manipulation.
It said smaller investors who were lured into penny stocks through social media campaigns generally lost money from day-trading highly volatile and illiquid shares that were only traded among themselves.
Meanwhile, promoters pre-positioned themselves and sold into the hype and demand they created to net a trading profit.
The report covered a period from January 2019 to July 2021 and pinned the peak of pump and dump schemes at around March 2021.
That was shortly after overall retail trading activity peaked on the Australian Securities Exchange in January 2021 as the hype around Gamestop attracted unprecedented interest among novice investors.
Then the main online retail brokers accounted for more than $70 billion of trading turnover, close to 20 per cent of the entire sharemarket trading.
Around March 2021, ASIC estimated that around 22 pump and dump schemes a day were being operated involving stocks with market capitalisation below $60 million.
It said the social media-led pump and dump campaigns appeared to target low capitalisation stocks with limited liquidity creating a self-contained pool of buyers and sellers.
“Normal trading in these securities was small and so trading over the pumps was essentially limited to the day traders themselves,” ASIC said.
“Financial transfers were largely limited to profit and loss movements between the participating day trader.”
Meanwhile, it estimated retail investor losses to have topped $6.3 million per month from January 2019 to July 2021.
During this period, ASIC said it had noticed a market increase in anomalous price moves, elevated investor interest in small and micro-cap securities, along and a significant increase in day-trading activities.
The price moves it said were more prevalent in less liquid securities which had quoted prices below 37¢.
ASIC said pump and dump schemes were enabled by organised social media campaigns and a practise known as momentum ignition. This was complemented by highly aggressive day trading accounts that targeted certain penny stocks.
Some traders accounted for up to 30 per cent of certain securities’ turnover on their own.
“Momentum ignition is the practice of aggressive purchasing by one or several accounts to have a significant impact on price and encourage other traders to participate in the buying activity.”
“This activity further impacts the price of the underlying security.”
These social media campaigns, ASIC said, were “overwhelmingly positive and tended to express strong support for the securities discussed.”
It said that as a result of the pandemic, there was a surge in retail trading but said over time activity in the more speculative smaller end of the market increased disproportionately.
The number of accounts that traded penny stocks with market capitalisation below $7 million tripled from 11,700 in 2019 to almost 30,000 in 2021 while accounts trading stocks with market capitalisation below $20 million increased by 2.6 times. By comparison trading in larger stocks doubled.
The regulator also said there was a marked increase in turnover from day-traders in smaller stocks from about 25 per cent of volumes to almost 40 per cent when retail participation in the sharemarket peaked.
“Market order-books for pump and dump events, promoted over social media, were overwhelmingly populated by retail day traders before market open.”
ASIC attempted to quantify the investor outcome as a result of these pump and dump schemes and came up with an estimate of $6.3 million per month of losses.
In trying to quantify the investor harm from these schemes, ASIC said it analysed the outcomes of smaller accounts that traded less than $100,000 per day.
It said that investors sold out for a loss of more than $800 compared to the end of day price about 16 per cent of the time compared to 5 per cent in non pumped markets.
The biggest losses were suffered by accounts that partially sold out of their intraday positions, it said.
Promoters that instigated social media pumps, often pre-positioned themselves before an announcement and sold early into the demand, for a profit, ASIC said.
“Our analysis of the conduct of promoters of social media pumps suggested that they may have been engaged in market manipulation.”
ASIC said that it was able to match social media pseudonyms to trading accounts to work out who was making money from the schemes.
It also found a number of trading accounts that were active in unusually volatile micro-cap stocks, small rings of aggressive traders that it suspected co-ordinated purchases and sales to entice interest from other investors.
Meanwhile, it found professional traders that regularly targeted “micro-cap securities through aggressive, high-impact, short-term and non-algorithmic day-trading strategies.
“In many cases, it appeared that individual traders accounted for 30 per cent of a targeted security’s turnover and gave a false impression of true market demand.”
ASIC added that market participants had a responsibility to monitor these activities. It said some brokers “failed to critically analyse, and report, potential misconduct of high-impact clients” and expects them to vet all client orders.
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