Pump and dump finds a new home - on social media and chat forums

IT was 12.43 am on Jan 19, and TRGainz, a frequent user of the social media platform Stocktwits, was getting antsy. "You guys still awake?" he posted. Alwaysliquid was up too. "Can't sleep," he shot back seconds later.

In some nine hours, financial markets would open in New York, and when they did, an obscure penny stock by the name of Blue Sphere Corp would suddenly, and seemingly miraculously, soar, handing a windfall of some US$30 million to those who had loaded up on the stock in the weeks before.

TRGainz and Alwaysliquid knew what was coming and were struggling to contain their excitement. For days, chatter on this Stocktwits page and others, like a message board for Reddit users dedicated to penny stocks, had been steadily building about Blue Sphere.

That the company had neither a stock exchange listing nor recent financial disclosures of any kind seemed not to matter to anyone. It was a clean-energy company and, with the Democrats taking control of both the White House and Congress, that was enough to make it a sellable story to the day-trading masses who had turned into an unstoppable force in the great pandemic stock rally.

Moneyman223 was a prominent voice throughout, imploring fellow members to jump in before the stock exploded. "Get in or regret not getting in," the moneyman posted early Jan 14, a day after another Stocktwits member had tagged Blue Sphere as a clear winner from the Democrats' climate-change agenda.

Late the next day, the final session of trading before the long weekend, Moneyman223 was prodding again: "not too late for you fools to still get in." Then a character named byelowsellhi declared: "Have a great weekend fellow future millionaires."

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Blue Sphere soared as advertised on Jan 19. By the end of the day, it was up 451 per cent, having risen from six-tenths of a penny to over 3 cents. Roughly 2 billion shares traded that day, staggering and yet not altogether abnormal volume in a burgeoning new age of penny stock speculation.

On any given day, there are a dozen or more Blue Sphere-like stories of tiny, profitless companies that mysteriously go from obscurity to viral sensation. Lately the frenzied pace of boom and bust in these penny stocks has started to drown out all the other forms of speculative mania in the pandemic-era market.

Call it another froth marker - retail traders beset with mass psychosis amid zero-commission fees and zero benchmark interest rates - to be filed alongside the GameStop Corp saga, the three-fold rally in cryptocurrencies, the SPACs that are minted daily and the record highs being plumbed by major equity indexes.

"People start to look around and say, 'What else can I do with my money?'" said JJ Kinahan, chief market strategist at TD Ameritrade. "Those would be one of the ones on the top of my list to say to people, 'Please understand the risk that you're taking going in there.' I learned early in life, if there's a lot of upside, there's a lot of downside. People just might not want to tell you about the downside."

For anyone observing at a distance, it's hard to understand how penny stocks of the moment are chosen. How does critical mass form around them? The universe of companies that make up off-exchange trading in America is vast, and they trade on lightly regulated quotation services where information is scant to non-existent. Like everything on the Internet, it's next to impossible to track down exact origins. But in trying to locate the spark, these types of message-board conversations almost always presage takeoff.

And while nobody so far is ascribing illicit intent to the goings-on in today's trader-chat rooms, it's hard not to note the similarity to the penny-stock crazes of yesteryear, when schemes like "pump-and-dump" and "greater fool" were the rage.

Stocktwits, which bills itself as the largest community for investors and traders, has been increasing its focus on content moderation and support to crack down on get-rich-quick scams, according to chief executive officer Rishi Khanna.

"It's something we keep our eye out for. Now we can't obviously pay attention to every single screen, so we depend on the community to report something that might seem a little bit off or funky," Mr Khanna said in an interview. "We're not going to stop it all - that's just physically impossible - but we do our best."

Attempts to contact officials at Blue Sphere for comment were unsuccessful. E-mails and voicemails left by Bloomberg News weren't answered.

The company hasn't filed a report with the US Securities and Exchange Commission in roughly two years. In the aftermath of the stock's surge last week, a Stocktwits member with the user name WolfeRegalia, wrote: "I can't find any real information. Company's website has financials backed to 2018. Any leads someone can recommend? Thanks in advance."

Such is the challenge of telling a true long-term penny stock investment from a straight pump - when a group of people pile into the same stock at the same time to quickly influence prices.

One rapidly growing Reddit forum dedicated to penny stock trading recently updated its rules to curb user shilling. The page, r/pennystocks, now boasts over 430,000 members - "astronauts", using the site's own nomenclature. That's up 21 per cent from the end of December, according to Breakout Point, a data and analytics firm that tracks such information.

At the top of the r/pennystocks page is a frequently asked questions drop down menu. One option reads, "Identifying a pump", and links back to a three-year-old post titled, "How to find, and ride pumps". The first step? According to the post, start by downloading Stocktwits, but use your own discretion.

"I hesitate to tell you this simply because I don't want you to buy into all the hype on there," the post reads. "Remember, don't trust anyone, especially all the talk on Stocktwits. Most of it is all garbage. Don't believe it."

Then find a stock that's recently gone parabolic, do some research to see which people were telling folks to buy before the surge (they're the pumpers), follow those people and set up alerts for when they make new posts.

"Don't cross the line," the post reads. "Now I do want to stress the importance here that pumping a stock is illegal. However investing in a stock that is rising in price and volume is not." But in closing: "Good luck everyone! May your losses be low, and your gains be high."

These days, there are plenty of hopefuls out there. As for Blue Sphere, it appears the fever hasn't broken. The stock price did almost collapse 50 per cent in the first three days after its Jan 19 pop, but on Monday, it shot higher once again, ending the day at 2.2 cents, for a gain of 26 per centg. BLOOMBERG

READ MORE: The GameStop reckoning was a long time coming