THE PUMP AND DUMP SCANDAL

I’m no author but I have just recently finished writing my first (and last) ever book, entitled “The 13 Insider Trading Secrets that will blow your mind” It’s an expose of what goes on in the City from the 20+ years that I have been in the game and specifically it talks about how trading and investing in general is rigged in favour of the professionals against the retail investors. There is some pretty hard-hitting truth of what goes on behind closed doors that I think needs to be out in the public domain. The scandals, money laundering, clients being ripped off, principal dealing, CFDs, brown paper envelopes, FX scams, boiler rooms, the drugs, the parties – it all goes on but nobody finds out about it, or at least the general public doesn’t and I think that’s wrong. You could say it’s a bit like ‘The Wolf of Wall Street’ but the UK version – and no, I’m not the wolf, much less Leonardo DiCaprio. But if you want to give me a role in the film then you can think of me as the good guy that’s making it difficult for the bad guys to do what they do and rip people off. However, the problem is that now that I have written the book, it seems that I can’t help but go back, re-read it and then add more to the chapters. I read it back and I think ‘hmm…maybe I should just add the part about…’ and before I know it I have just doubled the length of the chapter. I’m not sure if J K Rowling experiences the same problem – I guess it’s the opposite of of ‘writer’s block’. Anyway, I thought I would share with you a few short extracts from one of the 13 Insider Secrets which is ‘The Pump & Dump’. Learning about the Pump and Dump as well as all of the other little tricks that the professionals don’t want you to know about in the market place will put you in a much stronger position when it comes to your own investments. That’s because unfortunately when it comes to the stock market not everybody plays fair and so you need to know how they bend or break those rules so you can protect yourself and your own portfolios. Here’s the Pump and Dump… The Pump and DumpThe ‘Pump and Dump’ is a horrible name for a horrible dirty secret that costs investors every single day. And whilst it goes on in the professional investment world, it is also rife in the private investor world. In fact, sometimes it seems that everybody is at it. It works like this. Investors (either professional or retail) will circulate false information on the internet usually via share forums, to drive the price of a share upwards. This is called ‘talking up a stock’ and is the process where one person will typically post comments on an investor chat room that he or she has heard news about a specific company. The company will always be a small penny share because it is only a penny share that can be affected by news in this way. So, let’s say that the company is a small oil and gas company drilling in some remote part of the world and the company is trading at 1p. If an investor posts a comment saying that there is a rumour that the company has just struck a massive oil field or that there is about to be an announcement that the company is about to get taken over at 10p, what do you think will happen? Well that depends on who is sending this statement and whether anybody else is agreeing with them. If the person has a level of credibility within the trading floor chatroom, which either usually comes from making some good investment calls or from just being in that group for a long time, then anything that they say on the chatroom will be taken as valid. Now what happens is that people on the chatroom start talking to each other and ‘whispers’ develop; that’s where investors don’t take any action but begin looking into the company, researching, looking at company news, recent market development and then get chatting to others. The fact that they don’t find anything on the company makes no difference, because just the mere act of chatting about a small, previously unheard-of penny share company, is enough to generate enough attention for those whispers to travel to China. Yes, you know what I mean – Chinese Whispers. Suddenly information is being slightly altered as it moves from the lips of one investor to another and before you know it barely represents the initial story. More importantly it creates confusion and uncertainty, it creates an air of not knowing what is going to happen next and that’s where human greed kicks in. Because of the fear of missing a ‘once in a lifetime’ opportunity investors start making silly decisions based not on facts on what others are doing around them. It’s the fear of missing out that drives them. Now imagine that in the middle of all these whispers and commotion, all of this ‘buzz’ on a chat room, that another ‘respected investor’, on a completely different chat room spreads the same rumour as the first person. In other words, another ripple somewhere in a different part of the pond has been created. And what about if another person in another chatroom says something similar, or better still how about if there are two completely unrelated people in the same chatroom both confirming the same story. How powerful do you think that might look? And don’t be fooled thinking that these internet chat room traders are just kids. Many of them are serious fraudsters who team up with IT experts in India and Bangalore in particular. These fraudsters work closely with computer professionals who get paid handsomely to hide the true identity of the fraudsters by setting up multiple accounts and constantly change their IP address which puts them in different locations all over the world. This stops their scandal being found out and shut down prematurely because it appears that the different users who are all talking about the stock are totally unrelated because they living in different continents. You see it doesn’t take much with the internet moving information at quite literally the speed of light for one rumour to become major news in the investment community.However, what really makes it interesting is when some people start buying because quite often they will post on their chatroom that they have done so. For example, “It looks good to me, I’ve just bought a small stake of £2k – let’s see what happens” one chatroom user might post. That is likely to trigger another person to buy some shares, which in turn might push the price up slightly. Suddenly the conversation quickly moves on from a rumour to a share price movement. “Have you just seen the price move? It’s just jumped up 5%…I’m getting in” somebody might write. Before you know it, there is a mad rush to buy this stock that just two hours ago nobody had even heard of. The share price suddenly jumps up as investors all pile in. Logic and rationale go out of the window because now it’s all about the two emotions of investing – fear and greed. People are fearful of missing out and greedy because they want some of the action. It plays on human nature which is why this scam works so well. If you throw in £2,000 into a 1p stock and by the end of the day that company is trading at 2p, well you just made £2,000 or a 100% return – which other investments can you think of that pays 100% in a day? If you kept the same £2,000 in the bank earning 0.1% interest it would take 1,000 years to make the same interest! Now imagine that the stock doesn’t move just from 1p to 2p but to 5p or 10p? In fact, it could go even higher – after all who is to say how far a share might go? Remember a price only moves upwards because there are more buyers than sellers so for as long as there are enough people in the chatrooms fuelling the fire of speculation, there is nothing to stop the company accelerating into the stratosphere….at least for a while. That’s when ‘the Dump’ happens… I hope that the book is going to be a real eye-opener for investors because I have literally read hundreds of trading and investment books over the years and there is absolutely nothing like this that I have ever seen. This doesn’t mean that I am particularly gifted in any way, far from it. But I do think that it means perhaps I am little braver to speak out about the injustices that go on and I don’t mind putting my neck on the line for the truth to prevail. Typically, City traders need to do something really stupid like Nick Leeson did, get caught and then write a book about it before the scandal hits the public airwaves. The difference this time is that unlike Nick I’m not doing anything stupid and so I’m not fearful of being caught. That said I am still a qualified professional running my own FCA regulated company in the City of London and so what I’m going to expose will certainly ruffle a few feathers among the investment fraternity. In fact, when I expose what I do, I will probably make a few (more) enemies in the City. But that’s okay by me, as I’m hoping to pick up a few new friends along the way.