Is this legal? (stock market question)

If several average people (not insiders or mega-rich) coordinate in order to buy a stock on the same day, thereby trying to increase its price, is that illegal?

What if it was 10,000 people coordinating their buying via a website? (e.g. subscribers log in everyday just before marker opens, and the website says “buy 100 AAPL”)

What law would this be violating? (I assume there must be some law against this)

Also, irrespective of whether it is legal or not, would this strategy work? That is, if the market knew the next “target” of this group on a particular day, how would the price of this stock behave? Would it in fact go up?

(Let’s assume that the group ends up accounting for, say 30% of the day’s volume on the stock)

One more thing: If the above is illegal, how is that distinguishable from websites that give investment advice, like fool.com and countless investing newsletters?

Couldn’t the people running this website just add a couple of lines of “research” about this stock and “advise” their subscribers to buy, just like all those other websites do?

I don’t think it is illegal at all. I also can’t see the upside for these people. They are just screwing themselves. The beuaty of the market is that it self-corrects almost in real-time. The price will increase as more and more of them place orders on the same day. The price will drop as they start selling. Therefore, it would be possible in theory for one person to buy at the starting rate at the beginning of buying and them jump out when it hits its high. The problem is that there is no way to predict that. The stock could potentially soar or plunge based on the way that other people outside of the collusion would react to the move.

I suppose it would be possible for some evil-mastermind to harness the power of gullible people to make stock rise so that he can sell. However, I am not sure if that what you are talking about or if that is against the law.

Here’s a young fella that does exactly what you discribed:

http://lebed.biz/

He has his “sheep” that follow him around. There are a few tricky legal considerations. There was a fellow named Tokyo Joe that worked the “pump-n-dump” scheme back during the internet bubble. You can read about him here:

http://www.thestreet.com/tech/internet/854993.html

I’m not sure if “pump-n-dump” is against the law or not, it seems like the big players (i.e. Goldman Sachs), get away with it all the time.

What you’re describing is pretty close to the practice of “pump and dump” that’s fairly common in the OTC market.

Here’s how it works. A “market maker” (probably working for some shady boiler-room broker) will try to generate interest in a specific stock. After persuading a sufficient number of gullible investors to buy the stock, thereby pushing up the price, the market maker dumps his own position and pockets the profits.

This strategy isn’t going to work well with a company like Exxon or Wal-Mart, but take a small-cap, minimally traded company and a big enough pool of potential suckers – errr, investors – and it can be done.

Pump and dump is illegal – if you have a monetary interest in a stock, telling people to buy so that you can profit will get you in a lot of trouble. At the very least, the SEC enforcement division will be very interested.

Of course, there are ways to do it. If you have an interest, you cannot say “this stock is going to explode!” You can say, “we expect the stock to reach $X in the next six months.”

Now, if you have no monetary interest, you can say what you want. You’re also less constrained if you’re not licensed by the SEC. Thus, Jim Cramer can get on TV and say a particular stock is upgraded to “Don’t buy” :wink: and that will effect the market. That’s legal provided he has no money invested in the stock. I also believe that if there full disclosure that he has invested, it’s also OK.

As far as the website idea: the SEC is charged with keeping a free and fair market, which gives them a lot of clout. They would probably hit the 10,000-investor website with an injunction if it were actually moving the market and have them explain before going further.

The idea is not to screw the people who subscribe to this website.

The idea is to get enough momentum going in a stock (by buying, say 30% of its average daily volume), and when the stock goes up, everybody in this group sells.

Of course different members of this group will make different amounts of money (depending on exactly when they bought and sold the stock), but, the idea is that with some good rules of thumb most if not all people in this group will come out ahead.

The people who will lose out, in theory, are the people who don’t subscribe to this website and won’t know about this “pack behavior”, and might mistake the rally as something real and buy the stock when it is high.

Can such rules of thumb be created to ensure everyone in this group of people benefits?

Will such a website be illegal?

What specific law will it be breaking?

What about these two scenarios:

  1. A computer randomly picks the next target stock (based on some criteria like average daily volume) and just announces it everyday on a website that is set up like a non-profit organization.

or

  1. The website owners don’t own any stocks, but make their money by charging monthly fees to subscribers.

So, in the above scenarios, no one with a monetary interest in the stock is telling people what to buy.

[Of course I’m not thinking of creating such a website. If I were, I wouldn’t be asking about it on the SDMB]