Nerds on Wall Street: Math, Machines, and Wired Markets

11.8. Cyber-Manipulations

Message board scams are entirely new—a pure Internet phenomenon. Unlike in de la Vega's time, scalability is much less of an issue given the ability to post messages on multiple boards at one point in time and to replicate those messages again and again. Hundreds of thousands of messages are posted on dozens of boards every day. Some of them contain real information and some are just scams, but they change the market. There are hundreds of these cases: Raytheon, PairGain, Franklin, HealthSouth, Coho Energy, Ascend, and many others—so many, in fact, that we categorize them in what follows.

11.8.1. Fake News: PairGain Technologies and Aastrom Biosciences

A good example of message manipulation occurred with regard to PairGain Technologies Inc., a telecommunications firm. In April 1999, an employee of PairGain posted a message on a Yahoo! bulletin board alleging that PairGain had agreed to be acquired. The message contained a hyperlink to the supposed source of the rumor, a Bloomberg news announcement. Figure 11.1 shows what happened.

The announcement was a fake, as was the Bloomberg page, which was complete with phony advertisements. PairGain's stock price soared on the announcement. An investigation by the SEC led to a guilty plea by the employee, who received five years' probation.

Figure 11.1. Daily Prices and Volumes in PairGain, April 1999 Reprinted with permission of BigCharts.com, © 1999 Dow Jones & Company, Inc. All Rights Reserved Worldwide.