Pump and Dump: Price Manipulation in Experimental Markets

Abstract

We study how social media messaging affects asset markets using experimental methods. Participants trade in markets with asymmetric information, some markets with and some without the ability to send anonymous public messages. Rather than improving market efficiency through information sharing, we find that messaging facilitates profitable pump-and-dump strategies. Informed traders systematically post misleading messages to manipulate prices. These manipulation schemes are frequently successful, with price manipulators earning substantially more than other informed traders. We also observe deceptive strategies by uninformed traders, though these were generally unprofitable. Both successful and unsuccessful manipulation schemes reduced market efficiency, highlighting an important consequence of investors using social media for financial communication.