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. They spread “poop” so they can then buy or "scoop" the stock at a lower price. They can purchase the stock at bargain prices if they're successful because the overall marketplace will have sold off the security and this causes the price to fall dramatically.
“Poop and scoop" is generally frowned upon by securities exchange regulators and it can be prosecuted by the U.S. Securities and Exchange Commission (SEC).
Key Takeaways
- 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 about it.
- The explosion of online communities, platforms, and finance-related discussion groups has made it possible to conduct such schemes with minimal investment and ease.
- Poop and scoop perpetrators can be prosecuted by the SEC.
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. Participants in a “poop and scoop” scheme intend to buy the targeted security at a discount, knowing that the temporarily depressed market price doesn't reflect the security’s true value. They can then later sell the security at a profit.
The SEC classifies this type of activity as a form of market manipulation and securities fraud under the 1934 Securities Exchange Act.
“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 hope that it will artificially raise the price so they can sell their position at a much higher price.
“Poop and scoop” is somewhat less common than the "pump and dump" strategy. 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 then selling a well-known, higher-priced stock. But 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 illegal tactic employed by unethical traders is "short and distort." Investors short sell the security and then talk the value down by spreading misinformation for a profit instead of buying the stocks at a discount when false information causes the price to drop. A large investor could also parlay off the noise that genuine shorters are generating by recognizing a legitimate short position being built in a company.
An activist hedge fund could be publicly amassing a short position while making it known that they're launching a campaign against certain corporate actions and are shorting the stock accordingly. A “poop and scoop” or “distort and short” opportunist could help the activist hedge fund by exaggerating and adding to the negative news to capitalize on it. The negative news surrounding the stock would subject it to scrutiny while also accumulating a short position.
Technology and Market Manipulation
The explosion of online communities, platforms, and financial hangouts has greatly added to the misinformation issue. Companies can find it difficult to keep ahead of the spread of fake news. Even the best PR and communications teams are hamstrung by regulatory oversight. It's not uncommon for a single tweet to send a stock's price sharply lower. This perplexes regulators because it can be difficult at times to ascertain the true intentions of a social media post.
The rise of influencer marketing hasn't helped financial markets maintain order.
The rise of high-speed trading algorithms that make trades based on news, events, and market mood may have mixed effects on market manipulation tactics 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-based market manipulation.
Algorithms might have the opposite effect if they can be programmed or learn to distinguish fake from legitimate information better than human traders. But such smart algorithms might just as easily be used to work in conjunction with fake news bots to produce, distribute, and trade on more convincing fake information. This would fool other, less sophisticated algorithms and traders and could greatly magnify the market and economic damage as well as gains to manipulators.
An Example of Poop and Scoop
The SEC charged Scottish national James Alan Craig of Dunragit, Scotland with violation of securities laws in November 2015. Craig tweeted out false statements about two companies from fake Twitter (now X) 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.
Craig tweeted that Audience Inc. was under investigation in the first instance. He sent 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 fake news.
Craig sent out another tweet the next day stating that Sarepta Therapeutics Inc. was under investigation. This time the tweet was sent from an account styled to resemble that of Citron Research, another securities research firm. Craig's tweet caused a 16% decline in Sarepta's price.
What Are Some Other Forms of Market Manipulation?
The market is also vulnerable to "wash trading." This is the practice of repeatedly buying and selling a security to convince others that it's hot and worth buying. "Bear raiding" occurs when a potential investor believes prices will fall and heavily sells a stock to reduce its price. Bears are the opposite of bulls, who buy a stock based on the belief that it will go up in value.
Why Is Market Manipulation Harmful to Society in General?
Researchers have demonstrated that market manipulation to influence prices is both possible and potentially profitable for manipulators. But it harms society by reducing the effectiveness of arbitrage in discovering the true valuation of securities. It reduces the efficiency of the market in allocating productive resources in the economy.
The Bottom Line
There's very little difference in the motives behind 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. But “poop and scoop” play is a deliberate attempt to manipulate a stock price. An activist hedge fund can be seen as simply exercising the gears of capitalism. Poop and scoop perpetrators can be prosecuted by the Securities and Exchange Commission.
