Layering is a market-manipulating tactic in which a high-speed trader places fictitious orders for a stock or some other asset in order to drive the price up or down, and then, if successful, makes the opposite trade.
For example, if the trader wants to buy a stock at a lower price, they place multiple sell orders that they have no intention of filling to create the impression of selling pressure in the hope of driving down the market price, at which point they buy the stock.
Conversely, if they wish to sell a stock at a higher price, they would place multiple buy orders hoping to create the impression of buying interest, thus boosting its price.
Layering vs Spoofing
Layering is similar to spoofing, and some people use the terms interchangeably, but there is one key difference between the two.
In spoofing, the trader places one big buy or sell order hoping thereby to drive the price of the asset up or down, depending on his strategy. They then place smaller orders at the opposite end of the transaction to take advantage of the change in price.
Layering, by contrast, involves placing multiple smaller orders at slightly different prices with the intention of driving the price up or down. Then, the trader executes the opposite trade in order to benefit from the price change.
Layering is considered a more "advanced" form of spoofing because it creates the false impression that there are multiple orders and investors on one side of the trade.
Spoofing and layering were both outlawed by the U.S. Dodd-Frank Financial Reform Act of 2010 as forms of unfair market manipulation. They are considered manipulative because the trader is able to execute their trade at a more advantageous price than they could get from a legitimate order.
Under U.K. law, spoofing and layering are not expressly defined as illegal but the Financial Conduct Authority has ruled that they fall within the market abuse provisions of the Financial Services and Markets Act of 2000 and several civil enforcement actions have been brought against alleged transgressors.
Spoofing and layering can be difficult to prove in either jurisdiction, as traders make and cancel trade orders for any number of reasons, including legitimate ones.
Risks Of Layering
Besides being illegal, layering is not a riskless tactic financially. The trader runs the risk that a large buy or sell order comes in at a better price that is executed before they can cancel their orders at the other end of the trade.
For example, if the trader places multiple sell orders for a stock at around US$20 a share—hoping to drive the price down to buy it at a lower price—but another larger, bona fide order is executed at US$21, they may be forced into buying a now higher-priced stock if they don't cancel the buy orders in time.
Likewise, if they place multiple buy orders at around US$20 a share—hoping to boost the price and then sell it—but a larger buy order swoops in at US$19, they may have to deliver shares to buyers at the lower price if they don't cancel the sell orders in time. Getting caught like that could lead to large financial losses.
Layering is a form of market manipulation in which a trader places multiple bogus orders at slightly different prices for a stock or other asset in order to artificially drive the price up or down with the hope of profiting on the opposite end of the trade.
Layering is similar to spoofing, both of which were outlawed in the U.S.