The BBC reports that stock pump and dump scammers are offering their services to companies to 'improve' their stock prices.
Its not a suprising development but it would be very surprising if it became a widespread problem. The pump and dump spams make money for the perpetrators in the very short term. In most cases a stock that has been targetted by a pump and dump scam will be trading significantly below the original asking price a few weeks later.
The management of a company would have to have a very short term reason for inflating their stock price in order for this type of scheme to be attractive. There are much simpler ways to achieve the same effect that do not involve such clear cut illegality.
It is not difficult to see why the net effect of these schemes is to reduce the price of the stock. Pump and dump schemes target 'penny stocks', stocks that trade in very limited volumes. The thin trading volume means that a small increase in demand for the stock can lead to a rapid increase in price. Speculators drawn in by the pump and dump spams and momentum traders attempting to profit from the rapid rise in price both increase demand for the shares and the volume of shares changing hands. Shareholders with large positions that they had previously been unable to unload have a small window of opportunity in which they can dispose of their shares. Few people will pass up the opportunity to sell for a million dollars what they had been unable to sell at half the price for several years.
Once the temporary effect of the speculation has ended fewer shares will be held by long term investors and a greater proportion will be held by short term speculators. Such a market will clear at a lower level than it did previously.
If the stock scammers had a deeper understanding of what is going on they might well propose their services to competitors of companies in this position rather than the companies themselves. I expect the next wave of solicitations for this type of service to propose it as a means of engineering a hostile takeover of a competitor.
