What Is Poop and Scoop?
“Poop and scoop” occurs when a small group of informed people attempts to drive down a stock's price by spreading false information, rumors, and otherwise damaging information (“poop”) in order to then buy the stock at a lower price (“scoop”). If they are successful, they can purchase the stock at bargain prices, as the overall marketplace will have sold off the security, causing the price to fall dramatically. “Poop and scoop" is generally frowned upon by securities exchange regulators and can be prosecuted by the SEC.
- Poop and scoop is an illegal scheme in which a small group of informed people attempts to drive down a stock's price by spreading misinformation.
- The explosion of online communities, platforms, and finance-related discussion groups has made it possible to conduct such schemes with minimal investment and ease.
Understanding Poop and Scoop
“Poop and scoop” is a deliberate strategy to try to move the market price of a security by releasing or promoting false, negative information about a company or an asset. The participants in the “poop and scoop” intend to buy the targeted security at a discount, knowing that the temporarily depressed market price does not reflect the security’s true value and the price will once the rest of the market discovers this. They can then sell the security at a profit later.
The SEC classifies this kind of activity as a form of market manipulation and securities fraud under the 1934 Securities Exchange Act. Researchers have demonstrated that market manipulation to influence prices is both possible and potentially profitable for manipulators but harms society by reducing the effectiveness of arbitrage at discovering the true valuation of securities and thus reducing the efficiency of the market at allocating productive resources in the economy. This creates a need for a regulator to prevent securities market regulation (among other purposes).
“Poop and scoop” is the opposite of a "pump and dump," in which one or more individuals will spread false information on a security in the hopes of raising the price artificially and being able to sell their position at a much higher price. “Poop and scoop” is relatively less common, as the potential gains that can be realized by pumping up and then selling a low-value stock tend to be greater than those possible by pooping on and then selling a well-known, higher-priced stock. Both of these practices are illegal activities and punishable by the SEC in the United States.
Poop and Scoop vs Short and Distort
A similar (and likewise illegal) tactic employed by unethical traders is "short and distort," where instead of buying the stocks at a discount when rumors and false information cause the price to drop, investors short sell the security and then talk the value down my spreading misinformation for a profit. However, recognizing a legitimate short position being built in a company by a large investor, a “poop and scoop” (or a “short and distort”) could also parlay off the noise genuine shorters are generating.
For instance, an activist hedge fund could be publicly amassing a short position, while making it well-known they're launching a campaign against certain corporate actions and are shorting the stock accordingly. To capitalize on the negative news surrounding the stock subject to scrutiny, a “poop and scoop” or “distort and short” opportunist could help the activist hedge fund by exaggerating and adding to the negative news, while also accumulating a short position.
However, there's very little difference in the motives behind the poop and scoop and hedge fund investors. Both seek to spread information to drive the price of a stock down and also profit from buying the cheaper shares. However, the “poop and scoop” play is a deliberate attempt to manipulate a stock price, while an activist hedge fund can be seen as simply exercising the gears of capitalism.
Technology and Market Manipulation
The explosion of online communities, platforms, and financial hangouts has greatly added to the misinformation issue. In many ways, companies cannot keep ahead of the spread of fake news—even the best PR and communications teams are hamstrung by regulatory oversight. The rise of influencer marketing hasn't helped financial markets maintain order. For example, it's not uncommon today for a single tweet to send a stock's price sharply lower. This perplexes regulators as it's hard at times to ascertain the true intentions of a social media post.
The rise of high-speed trading algorithms that can make trades based on news, events, and market mood may have mixed effects on market manipulation such as “poop and scoop.” Algorithms that act on fake news or deliberately misleading public information can both increase manipulators' returns and exacerbate the social costs and damage of information base market manipulation. Alternatively, if algorithms can be programmed or learn to distinguish fake from legitimate information better than human traders, then they might have the opposite effect. However, such smart algorithms might just as easily also be used to work in conjunction with fake news bots to produce, distribute, and trade on more convincing fake information to fool other, less sophisticated algorithms and traders, which could greatly magnify the market and economic damage (as well as gains to manipulators).
Example of Poop and Scoop
In November 2015, the SEC charged Scottish national James Alan Craig of Dunragit, Scotland with violation of securities laws. According to the statement, Craig tweeted out false statements about the two companies from fake Twitter accounts that resembled those of actual securities research firms. "On each occasion, Craig bought and sold shares of the target companies in a largely unsuccessful effort to profit from the sharp price swings," the SEC wrote in its press release announcing the charges.
In the first instance, Craig tweeted that Audience Inc. was under investigation. He sent out the tweet from an account resembling that of Muddy Waters, a securities research firm. The stock price for Audience crashed by 28% in response to the false news. The next day Craig sent out another tweet that stated Sarepta Therapeutics Inc. was under investigation. This time the tweet was sent from a Twitter account styled to resemble that of Citron Research, another securities research firm. Craig's tweet caused a 16% decline in Sarepta's price.