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

11.1. The Power of Manipulation

In 1999, NEI Webworld, Inc. (NEIP) was an obscure, nearly bankrupt printing company. Its stock barely had a pulse. It had been kept alive as a shell company, used by firms that wanted to access the public markets, but without the scrutiny that comes with an initial public offering (IPO). The last trade had been over a year earlier, for a penny and a half. Suddenly it rocketed up 106,600 percent in one morning. What happened? A miracle cure? A hit movie? Pokémon lunch boxes? No, none of these. NEIP's move was propelled purely by the power of Internet message boards. Two (subsequently indicted) UCLA students dramatically demonstrated how the new technology of the Internet had dramatically transformed the old game of market manipulation.

The Internet raises market manipulation to a level only dreamed of by past shysters. It used to take a real effort, a PR firm, or a major newspaper column to reach millions of potential traders. Now anyone can do it from their desktop. The Internet era is defined by the unparalleled ability of the new style of manipulator to use the Internet to affect the perceptions of vast numbers of investors at lightning speed, all the while remaining completely anonymous. This article looks at market manipulations—from early scams of the 1600s to the high-tech frauds of today—and asks how the game has changed and what you can do to protect yourself.^[]

Who cares about this, anyway? Aren't these just isolated instances of little ...