How Short And Distort Schemes Work

Short and distort is a less publicly known trading scam similar to the classic pump and dump. Shorting is a word in traders’ jargon and means basically selling a stock, currency, crypto or any other similar financial item that can be traded.

Imagine some stranger reaches out to you and says:

“Buy this penny stock before it skyrockets, and you’ll get RICH!”

It may feel exciting, but you don’t need to take action if you don’t trust the advisor. Now, suppose a different example:

“Sell it now. You’re about to lose all your money!”

Then you feel fear. Even though your analytical indicators tell you the prices will most likely go up, you still question it with worry: could I lose it all?

Avoiding pain motivates investors. Rewards don’t do as much. 

If you can convince others to sell their stocks, with enough volume, prices will go down. Shorting allows investors to profit when markets go down.

Although shorting stocks has intolerable risks, it’s easier to drop the price than to raise it. Like pumping groups, agents can spread false stories to influence people and make them sell.

What if those rumors are wrong? Then, a tiny group of people makes money from misinformed investors.

Short & Distort: Sell High & Buy Low

Assuming prices go down, you can “rent” someone else’s stock, sell it at a high price, and re-buy when prices are low. The difference is your profit, which can be as much as 200%.

But shorting has a problem: the unlimited downside. If prices rise ten times, you owe ten times the amount you borrowed plus fees. That’s why traders who short must be careful with their bets.

Worst of all, you have to return the shorted stock depending on the client and demand regardless of timing. That’s why some short traders have invented reverse pump-and-dumps, also known as Short & Distort schemes.

Short traders can spread false negative rumors about stocks — often leveraged with the news — to cause artificial drops. When prices fall, they return their borrowed stock at a lower price, making a profit.

If it falls to zero, standard traders lose their money, and shorters double it. The lender receives less than he lent.

You may think of the lender as the big loser of the story. But the scammer exposes to bigger risks, potentially losing more than what you invest.

Aside from media manipulation, short scammers can steal accounts to protect from that terrible loss. You use common identity theft tactics and trade with someone else’s money. 

Is it worth trying so hard only to double your money?

How Does Short-And-Distort Work?

Unlike standard investing, you can’t do short trading with long term decisions. You never know how long you will keep a stock that’s not yours, so we need to act fast. Sell and buy as close in time as possible.

#1 The Short Sale

The fraudulent traders will short an amount they will then buy at a lower price. If they use stolen funds, they can afford to short large amounts, which might lower the price of a microcap stock.

#2 Influence Others To Sell

The traders spread fake news about the company to scare investors and sell their positions. You don’t need to get every investor out of the game, but if you fool the biggest contributors, it will cause the loss.

Once the price is falling, the masses will keep selling, lowering the price even more. 

Now, manipulation is harder than it sounds. You may not cause the stock to drop, but the bad news at least reduces the stock demand, so you can keep the shorted stock for longer.

#3 Returning The Stock

If you sell a $100 stock and have to return it for $30, you just made $70. Add some more zeros, and you can make thousands overnight.

The other trader loses $70 because a shorter’s fake news has driven investors away from that stock. 

In the worst-case scenario, the victim loses 100%, and the scammer earns +100%. In the best case for the victim, the negative rumors do no effect, prices rise, and they make a profit. But the shorter would be 200, 500, 1000% down the red.

Extreme Combination: Short & Distort + Pump & Dump

Distorting isn’t different from pumping. Scammers who do one the other usually know how to do both. 

If you trade with the right timing, you can amplify your profits very quickly. Whenever prices come to a spike, positive or negative, you use one strategy or another.

One quick note: Scammers don’t care about “fake” information in a strict sense, but facts that make prices go down. Prices fall:

  • Because of the natural changes in supply and demand;
  • Because a scammer encourages to sell based on fake negative news;
  • Right after a pumping scheme, when pumping scammers sell along with the masses.

Let’s see what may happen in the pump and dump:

  1. You create a trading account for standard operations and a margins account for shorting.
  2. You choose a microcap, illiquid stock and buy most of it.
  3. You spread fake positive news about a stock to cause price increases. People are buying more and more based on fake uptrends.
  4. Once you’ve pumped enough, you borrow (short) stocks for your margins account. You will profit after dumping the stock.
  5. You can now sell the shares you bought before the pumping at an inflated price. 

By this point, prices have fallen and ripped-off investors have no-one to sell their stocks. That’s when you’d come in (again) to buy (and return) the shares you borrowed at the pump-and-dump peak.

It sounds better in theory than in practice; it takes strategy to coordinate everything. The result? Scammers make money on the price increase and decrease. The other investors lose all their money on the pump&dump price drop.

How Identity Theft Makes Short-And-Distort Easier

Mind that the whole scheme fundamentals in many assumptions. You expect others to believe the fake news, to sell their shares, and to have enough time to buy low.

Even with the best strategy, you can never predict what people will do. When convincing isn’t enough, fraudulent traders can manipulate other’s accounts with a zero-risk scam: identity theft.

With phishing messages, you might steal a trader’s account and force the sale. But you’d need many of them to impact the price. (also, read “What Is Phishing?”)

Another motivation for identity theft is the truncated upside. You can win so much, but losing costs you everything. Think of a lottery with millions of tickets: the big prize gives you $1000, but you pay $1 million when you lose. Nobody would play it.

Shorting isn’t a lottery, but high-risk trading. Scammers don’t mind shorting stocks because it’s not their money what they are spending.

When you short, you’re borrowing money to sell a stock. When you steal someone’s account, you borrow money from them (without permission) without obligation to give it back (although it’s unethical).

Rogue trading isn’t a new concept. You’ll find cases of traders who stole their client’s funds for high-risk operations, expecting to return it later.

Legit shorters must return the stock as soon as they start losing their margin. But scammers may just walk away, or let the stolen identity take care of the problem.

Preventing The Scam: Can You Trust The Media?

Listening to rumors and news gives you an edge as a trader. Listening to one source doesn’t. No matter the market trend, patterns repeat themselves all the time. If you can’t find anything to verify the data, don’t give it any credibility. (Learn more about Investment Scams here)

#1 Understand The Incentives

If someone sells you “the secrets to make money,” you know they’re making something from it. If they show that you’re about to lose money instead, you’ll think they want to help you.

It’s too easy to misunderstand incentives in short-and-distort schemes. The scammer doesn’t ask you for money but tells you to protect it. If you don’t know what shorting is, you’ll miss the point: shorters make money when prices go down.

That awareness lets you make better questions: Are these rumors true, or is this agent just trying to profit from a loss?

#2 Know When To Short And When Not To

Just as crypto-traders create pumping groups, others could create “shorting groups.” A traders group may spread rumors and sell a big part of the stock, making shorters money.

Shorters need to move fast, timing the market instead of trying to understand it. You may have heard that over 90% of traders who try to time the market always lose. That’s the problem; you can’t predict with fifty variables changing every second.

Standard trading may not be get-rich-quick but can make you rich for sure.

#3 Make Decisions By Yourself

Refuse to believe that a single person or company has all the solutions to a problem. Don’t follow a trend only because other big names of finance are doing it. The only person you can trust is yourself.

Of course, it doesn’t mean others always want to scam you. It means a person with good intentions can make you lose money on mistakes you wouldn’t have made otherwise. It’s better to research and get it wrong yourself than losing because of someone else.

Wrapping Up

The next time you hear rumors about a stock, assume they’re wrong until proven right. Understand that traders have incentives no matter the trend. Trust the sources, but do your homework first.

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Will
Will

Check out jbii if you want to see the short and distort in action

JohnS0N
JohnS0N

Nothing on this website is theoretical, I didn’t add a real example (I might do it in the future) but rest assured this happens in real life.

Uri
Uri

Hi, is there a real example for this or is this theoretical?
Thanks

Uri

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