Spoofing can assume many forms, and can be defined broadly as the placement of orders (bids or offers) without the intent of actually filling
them.
In a narrower definition, such orders are placed with the sole objective of tricking other market participants into believing that there is a stronger interest in buying (or selling) than it actually is. If successful, the spoofer will drive other market participants to increase (or lower) the prices of their orders, and consequently will be able to sell (or buy) at more favorable conditions than she would have had if she had not spoofed. One spoof order usually has a tiny impact in the market price, but if such practice is done repeatedly it can allow the spoofer to achieve large profits.
Spoofing is not by any means a recent practice, but its frequency and market impact have been elevated to another level by high frequency and algorithmic trading.
Note that many in the market, including some regulators, use the terms spoofing and layering interchangeably, while others consider layering to be a specific form of spoofing that involves the placement of multiple layers of spoof orders.
Some of the main regulatory and institutional definitions are as follow:
The USA Dodd-Frank Act (2010) defined spoofing as the practice of "bidding or offering with the intent to cancel the bid or offer before execution".
The US Commodity Futures Trading Commission (CFTC) stated in an interpretive guidance that "reckless trading, practices, or conduct would not violate [the Dodd-Frank Act's spoofing provision]; instead, a person must intend to cancel a bid or offer before execution. Additionally, orders, modifications, or cancellations would not be considered spoofing if they were submitted as part of a legitimate, good-faith attempt to consummate a trade".
The EU Market Abuse Regulation (MAR), via its delegated act “Commission Delegated Regulation (EU) 2016/522 of 17 December 2015”, defined both layering and spoofing as the practices of “submitting multiple or large orders to trade often away from the touch on one side of the order book in order to execute a trade on the other side of the order book. Once the trade has taken place, the orders with no intention to be executed shall be removed”.
However, the European Commission, in its “Glossary of useful terms linked to markets in financial instruments”, defined spoofing and layering as being slightly different concepts: “Spoofing is a form of order book manipulation and involves putting apparent trades on order books to create a misleading impression of the stock price or liquidity. Layering is a form of spoofing by which a trader enters several orders to improve the price of a trade in the opposite direction. For example an abuser will:
• submit multiple orders at different prices on one side of the order book slightly away from the touch;
• then submit an order to the other side of the order book (which reflected the true intention to trade); and
• following the execution of the latter order, rapidly removing the multiple initial orders from the book.
By submitting the false orders the abuser gives the market a misleading impression which may encourage them to trade with the intended order.”
As mentioned, there are many ways a trader can spoof the market. Find below a couple of hypothetical examples of such practice.
Example 1:
Example 2:
Sources:
In a narrower definition, such orders are placed with the sole objective of tricking other market participants into believing that there is a stronger interest in buying (or selling) than it actually is. If successful, the spoofer will drive other market participants to increase (or lower) the prices of their orders, and consequently will be able to sell (or buy) at more favorable conditions than she would have had if she had not spoofed. One spoof order usually has a tiny impact in the market price, but if such practice is done repeatedly it can allow the spoofer to achieve large profits.
Spoofing is not by any means a recent practice, but its frequency and market impact have been elevated to another level by high frequency and algorithmic trading.
Note that many in the market, including some regulators, use the terms spoofing and layering interchangeably, while others consider layering to be a specific form of spoofing that involves the placement of multiple layers of spoof orders.
Some of the main regulatory and institutional definitions are as follow:
The USA Dodd-Frank Act (2010) defined spoofing as the practice of "bidding or offering with the intent to cancel the bid or offer before execution".
The US Commodity Futures Trading Commission (CFTC) stated in an interpretive guidance that "reckless trading, practices, or conduct would not violate [the Dodd-Frank Act's spoofing provision]; instead, a person must intend to cancel a bid or offer before execution. Additionally, orders, modifications, or cancellations would not be considered spoofing if they were submitted as part of a legitimate, good-faith attempt to consummate a trade".
The EU Market Abuse Regulation (MAR), via its delegated act “Commission Delegated Regulation (EU) 2016/522 of 17 December 2015”, defined both layering and spoofing as the practices of “submitting multiple or large orders to trade often away from the touch on one side of the order book in order to execute a trade on the other side of the order book. Once the trade has taken place, the orders with no intention to be executed shall be removed”.
However, the European Commission, in its “Glossary of useful terms linked to markets in financial instruments”, defined spoofing and layering as being slightly different concepts: “Spoofing is a form of order book manipulation and involves putting apparent trades on order books to create a misleading impression of the stock price or liquidity. Layering is a form of spoofing by which a trader enters several orders to improve the price of a trade in the opposite direction. For example an abuser will:
• submit multiple orders at different prices on one side of the order book slightly away from the touch;
• then submit an order to the other side of the order book (which reflected the true intention to trade); and
• following the execution of the latter order, rapidly removing the multiple initial orders from the book.
By submitting the false orders the abuser gives the market a misleading impression which may encourage them to trade with the intended order.”
As mentioned, there are many ways a trader can spoof the market. Find below a couple of hypothetical examples of such practice.
Example 1:
Sources:
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