What Is Spoofing?

Spoofing is an illegal form of market manipulation in which a trader places a large order to buy or sell a financial asset, such as a stock, bond or futures contract, with no intention of executing. By doing so, the trader—or “the spoofer”—creates an artificial impression of high demand for the asset. Simultaneously, the trader places hundreds or even thousands of smaller orders for the same asset, profiting on the increase in price brought about by the large fake order, which is then cancelled.

Spoofing is also known as bluffing, and has been around for decades as traders attempt to take advantage of other market players by artificially inflating—or deflating, as the case may be—the price of an asset. The technique has perhaps become more common, or at least gained more notoriety, in the 2010s because of the advent of speedy, high-volume and computer-driven trading systems. During this time, it also attracted the notice of securities regulators and law enforcement officials.1)Retrieved 10 April 2018 https://dealbook.nytimes.com/2014/10/06/a-new-crime-with-a-catchy-name-spoofing/

Spoofing is considered manipulative because the trader would not have achieved the price on the actual orders without first obtaining that price by virtue of the large bogus order.

Why Spoofing Was Made Illegal

In the U.K., the Financial Conduct Authority and the courts are authorised to fine spoofers. According to the FCA, “Abusive strategies that act to the detriment of consumers or market integrity will not be tolerated.”2)Retrieved 12 April 2018 https://www.financierworldwide.com/spoofing-the-order-book-uk-and-us-regulators-take-aim/#.Ws-eSpdrzcs/

Spoofing was made illegal in the U.S. by the Dodd-Frank Act of 2010 under Section 747, in which the practice is defined as “bidding or offering with the intent to cancel the bid or offer before execution.”3)Retrieved 10 April 2018 http://www.dodd-frank-act.us/Dodd_Frank_Act_Text_Section_747.html/

Spoofing is similar to another form of market manipulation called “layering.” Layering occurs when a trader places multiple orders at different prices for the same commodity in order to create the appearance of heavy buying or selling interest. The trader then subsequently cancels the orders.4)Retrieved 10 April 2018 https://www.cnbc.com/2015/04/22/flash-crash-course-what-is-layering-commentary.html/

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Criminal And Civil Cases

U.K. and U.S. authorities have brought several high-profile prosecutions and civil lawsuits against spoofers, both individuals and institutions, in the 2010s.

  • In 2013, an American trader named Michael Coscia agreed to pay US$2.8 million in penalties and disgorged profits to settle civil charges brought by the U.S. Commodity Futures Trading Commission. He also agreed to a one-year ban on trading. He also paid a US$900,000 penalty to the U.K.’s FCA. The following year, the U.S. Justice Department filed criminal charges against Coscia, in what is believed to be the first such criminal charge of its kind. The Justice Department alleged that Coscia made more than US$1.5 million over thousands of small trades.5)Retrieved 10 April 2018 https://www.wsj.com/articles/how-spoofing-traders-dupe-markets-1424662202//
  • In November 2014, Chicago-based Igor Oystacher (known as “The Russian”) was fined US$150,000 by the CME. The CME also banned Oystacher from trading for a month for alleged spoofing.6)Retrieved 10 April 2018 https://www.wsj.com/articles/how-spoofing-traders-dupe-markets-1424662202/
  • In 2015, the Justice Department charged Navinder Singh Sarao, a British day trader, with multiple counts of fraud and market manipulation, including one count of spoofing.7)Retrieved 10 April 2018 https://www.cnbc.com/2015/04/22/flash-crash-course-what-is-layering-commentary.html/
  • In early 2018, Deutsche Bank, HSBC and UBS agreed to pay a collective US$47 million to settle CFTC civil charges of spoofing.8)Retrieved 10 April 2018 https://www.nytimes.com/2018/02/01/business/banks-settlements-waiver-cftc-sec.html

Is Spoofing Difficult To Prove?

Although spoofing charges may have become more common since the practice was outlawed in certain countries, prosecutors and regulators must prove that the trader intended to manipulate market prices, which is often difficult to do. After all, traders and investors cancel trades all the time for one legitimate reason or another, including that they simply changed their minds.9)Retrieved 10 April 2018 http://www.businessinsider.com/what-is-spoofing-the-market-2015-4/

There is also a subtle difference between shrewd trading tactics and outright manipulation.10)Retrieved 10 April 2018 https://dealbook.nytimes.com/2014/10/06/a-new-crime-with-a-catchy-name-spoofing/

Summary

Spoofing, also known as bluffing, is a manipulative trading tactic in which a trader places a large order for a financial asset with the purpose of creating the impression of interest in the asset, thus driving up its price. However, the trader has no intention of actually filling the order and instead places thousands of much smaller trades that profit on the higher price, and then cancels the larger order. Spoofing was made illegal in the U.S. and U.K., who have both penalised violators.

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References   [ + ]

1, 10. Retrieved 10 April 2018 https://dealbook.nytimes.com/2014/10/06/a-new-crime-with-a-catchy-name-spoofing/
2. Retrieved 12 April 2018 https://www.financierworldwide.com/spoofing-the-order-book-uk-and-us-regulators-take-aim/#.Ws-eSpdrzcs/
3. Retrieved 10 April 2018 http://www.dodd-frank-act.us/Dodd_Frank_Act_Text_Section_747.html/
4, 7. Retrieved 10 April 2018 https://www.cnbc.com/2015/04/22/flash-crash-course-what-is-layering-commentary.html/
5. Retrieved 10 April 2018 https://www.wsj.com/articles/how-spoofing-traders-dupe-markets-1424662202//
6. Retrieved 10 April 2018 https://www.wsj.com/articles/how-spoofing-traders-dupe-markets-1424662202/
8. Retrieved 10 April 2018 https://www.nytimes.com/2018/02/01/business/banks-settlements-waiver-cftc-sec.html
9. Retrieved 10 April 2018 http://www.businessinsider.com/what-is-spoofing-the-market-2015-4/