Pump And Dump

Basic Information

The pump-and-dump scheme is a type of price manipulation used to exploit unsophisticated investors. In some ways, this is a form of arbitrage in which the perpetrator generates his own value gap:

1. The huckster chooses a commodity or security to target, usually a cheap one that they can easily buy in bulk.
2. The huckster secretly buys up the commidity.
3. The huckster convinces marks that the target is going to increase in value, creating a short-term speculative bubble (the "pump").
4. At the bubble's peak, the huckster begins selling off the commodity at the inflated price (the "dump")
5. When prices start dropping, the marks likely begin panic selling; this usually pushes the prices down to or below where they started.

Ironically, pulling off a pump-and-dump can actually build the scammer's credibility as someone to take financial advice from; after all, prices did go up when they said they would.
If the huckster's reputation is high enough to begin with, or his buying power great enough steps 2 and 3 can be combined - he starts to buy and the market follows, possibly at his lead or following the price signal. He then jumps off the bus once it is rolling, sells at the increased price, takes the profit and leaves others holding a stock which has increased in price for no good reason.

Sources

Bibliography

1. Wikipedia: Pump and dump

Game and Story Use

• May come paired with its reverse, the short and distort, to get people coming and going.
• In the modern era, this usually has a turn-around measured in hours or minutes. In earlier eras, it might take days or weeks just to buy up before the pump.
  • The PCs find out that someone is buying up a lot of something in preparation for a pump-and-dump. They have enough time to get word out, but can they actually prove it?
• In the modern era, this is usually done with stocks or other financial instruments. In earlier eras, it might target more important commodities like food or metal.
  • Food prices soar because of a rumor that it's only going to get more expensive; people are starving just so someone can rip off merchants.
    • Telling a deliberate P&D scam from a spontaneous bubble, especially in a paper commodities¹ or futures market, can be tricky at best. The two phenomena have been known to feed off one another.
  • Used against a nation's currency, this can serve as a form of economic warfare (see, for example, Tom Clancy's Debt of Honour, where a group of Japanese zaibatsu launch a series of pump and dumps against the US economy.
• The subsequent price crash can actually be used to acquire equity in a business or stock of a commodity - use the stock you have to pump and dump, take the profit and use that and your original stake to buy up discounted stock at the new, post collapse price.

Footnotes

1. That is, where title is traded without necessarily moving stock about