What is pump and dump?

According to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, pump and dump is the practice of taking of a long position in a financial instrument and then undertaking further buying activity and/or disseminating misleading positive information about it with a view to increasing its price, by the attraction of other buyers. When the price is at an artificial high level, the long position held is sold out.

Similarly, according to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, trash and cash is the practice of taking of a short position in a financial instrument and then undertaking further selling activity and/or disseminating misleading negative information about it with a view to decreasing its price, by the attraction of other sellers. When the price has fallen, the short position held is closed.

In my view, the inclusion of the practice of "undertaking further buying (selling) activity (...) with a view to increasing (decreasing) the price of a financial instrument" within MAR's definition of pump and dump (trash and cash) is a bit unfortunate, as it pretty much overlaps with MAR's definition for momentum ignition.

In fact, other relevant entities only include the dissemination of misleading information (and not the undertaking of further trading) within the pump and dump (trash and cash) definition.

Indeed, FINRA states, in a nice infographic called "The Anatomy of a Pump and Dump" (2016) that "once the shares are in their account, the fraudsters begin flooding email, social, media accounts and the internet with false rumors or fake promotions about how this company has developed some breakthrough technology or just signed a big deal. The stock´s price will jump as they convince people they are getting in on the ground floor of a 'hot stock'. After the stock goes up, the fraudsters decide when they think it has gone as far as it will go - and then they sell their stock for a big profit."

On its hand, the SEC describes pump and dump as the practice of "touting of a company’s stock (typically small, so-called 'microcap' companies) through false and misleading statements to the marketplace. These false claims could be made on social media such as Facebook and Twitter, as well as on bulletin boards and chat rooms. Pump-and-dump schemes often occur on the Internet where it is common to see messages posted that urge readers to buy a stock quickly or to sell before the price goes down, or a telemarketer will call using the same sort of pitch. Often the promoters will claim to have 'inside' information about an impending development or to use an 'infallible' combination of economic and stock market data to pick stocks. In reality, they may be company insiders or paid promoters who stand to gain by selling their shares after the stock price is 'pumped' up by the buying frenzy they create. Once these fraudsters 'dump' their shares and stop hyping the stock, the price typically falls, and investors lose their money.