“Stock‐touting” through spam e‐mails: a data mining case study

Abstract

PurposeAlthough the financial markets are regulated by robust systems and rules that control their efficiency and try to protect investors from various manipulation schemes, markets still suffer from frequent attempts to mislead or misinform investors in order to generate illegal profits. The impetus to effectively and systematically address such schemes presents many challenges to academia, industry and relevant authorities. This paper aims to discuss these issues.Design/methodology/approachThe paper describes a case study on fraud detection using data mining techniques that help analysts to identify possible instances of touting based on spam e‐mails. Different data mining techniques such as decision trees, neural networks and linear regression are shown to offer great potential for this emerging domain. The application of these techniques is demonstrated using data from the Pink Sheets market.FindingsResults strongly suggest the cumulative effect of “stock touting” spam e‐mails is key to understanding the patterns of manipulations associated with touting e‐mail campaigns, and that data mining techniques can be used to facilitate fraud investigations of spam e‐mails.Practical implicationsThe approach proposed and the paper's findings could be used retroactively to help the relevant authorities and organisations identify abnormal behaviours in the stock market. It could also be used proactively to warn analysts and stockbrokers of possible cases of market abuse.Originality/valueThis research studies the relationships between the cumulative volume of spam touts and a number of financial indicators using different supervised classification techniques. The paper aims to contribute to a better understanding of the market manipulation problem and provide part of a unified framework for the design and analysis of market manipulation systems.