Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation

Abstract

Price distortions created by so-called “pump-and-dump” schemes are well known, but relatively little is known about the investors in these frauds. By examining 470 “pump-and-dump” schemes and a large data set of trading records for over 110,000 individual investors from a major German bank, we provide comprehensive evidence on the participation rate, magnitude of the investments, the losses, and the characteristics of the individuals who invest in such schemes. Participation is quite common with nearly 8% of active retail investors participating in at least one “pump-and-dump” losing on average nearly 30%. Next, we identify several distinct types among participating investors, some of which (i.e., speculating day trader) should not be viewed as falling prey to the schemes. Recognizing this heterogeneity is key when designing investor protections because we find investor types respond differently to market manipulation. We also show that portfolio composition and past trading behavior better explain scheme participation than demographics. Lastly, we document longer lasting effects on participating investors that go beyond the immediate financial losses.

Keywords: Market manipulation; Pump-and-dump schemes, Securities regulation; Fraud; Investor protection; Lottery stocks; Household finance; Penny Stocks

JEL Classification: D14, G11, G18, K42, M48