Profitability and herding of trade-based pump-and-dump manipulation

We use the Korea Stock Exchange’s complete intraday order and trade data in a dataset that identifies individual accounts to examine whether trade-based pump-and-dump manipulators can trade profitably and whether other investors herd after the manipulation. The results show that other investors place more buy orders on stocks with higher manipulative buying volume and that more new investors buy such stocks. We also find that the trade-based pump-and-dump manipulation is profitable on average, both gross and net of transaction costs. Manipulators who have higher trading volume, more experience with manipulation, and less frequent transactions are likely to achieve larger profits. We also find that this type of manipulation is far more pervasive in the emerging market.