Spoofing (finance)

Spoofing is a disruptive algorithmic trading entity employed by traders to outpace other market participants and to manipulate commodity markets. Spoofers feign interest in trading futures, stocks and other products in financial markets creating an illusion of exchange pessimism in the futures market when many offers are being cancelled or withdrawn, or false optimism or demand when many offers are being placed in bad faith. Spoofers bid or offer with intent to cancel before the orders are filled. The flurry of activity around the buy or sell orders is intended to attract other high-frequency traders (HFT) to induce a particular market reaction such as manipulating the market price of a security. Spoofing can be a factor in the rise and fall of the price of shares and can be very profitable to the spoofer who can time buying and selling based on this manipulation. Under the 2010 Dodd-Frank Act spoofing is defined as "the illegal practice of bidding or offering with intent to cancel before execution." Spoofing can be used with layering algorithms and front-running, activities which are also illegal. High-frequency trading, the primary form of algorithmic trading used in financial markets is very profitable as it deals in high volumes of transactions. The five-year delay in arresting the lone spoofer, Navinder Singh Sarao, accused of exacerbating the 2010 Flash Crash—one of the most turbulent periods in the history of financial markets— has placed the self-regulatory bodies such as the Commodity Futures Trading Commission (CFTC) and Chicago Mercantile Exchange & Chicago Board of Trade under scrutiny. The CME was described as being in a "massively conflicted" position as they make huge profits from the HFT and algorithmic trading.

In Australia layering and spoofing in 2014 referred to the act of "submitting a genuine order on one side of the book and multiple orders at different prices on the other side of the book to give the impression of substantial supply/demand, with a view to sucking in other orders to hit the genuine order. After the genuine order trades, the multiple orders on the other side are rapidly withdrawn."

In a 2012 report Finansinspektionen (FI), the Swedish Financial Supervisory Authority defined spoofing/layering as "a strategy of placing orders that is intended to manipulate the price of an instrument, for example through a combination of buy and sell orders."

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