By Joseph Young

Summary

Spoofing is a form of market manipulation where traders place fake buy and sell orders with the intent of preventing them from being executed. Spoofing is often done using algorithms and robots in an attempt to create a false sense of supply and demand and manipulate markets and asset prices.

Spoofing is illegal in many major trading markets, including the United States and the United Kingdom.

Introduction

Many people say that large traders and whales manipulate the market. This is easy to refute, but most of the well-known market manipulation methods require large holdings of coins. In this article, we will take a closer look at the scam technique called "spoofing".

What is spoofing?

Spoofing is the process of placing fake orders to buy or sell assets such as stocks, commodities and cryptocurrencies in an attempt to manipulate the market. Traders who spoof the market typically use robots or algorithms to automatically place buy and sell orders. When an order is about to be filled, the robot will automatically cancel it.

The core idea behind spoofing is to disrupt the market and mislead the market about buying or selling pressure. For example, spoofers may place a large number of fake buy orders at a certain price range to create an urgent demand for the asset in the market. As the market approaches this point, they quickly cancel the orders, causing the price to continue to fall.

How does the market deal with spoofing?

The market usually reacts strongly to spoofing orders because it is difficult to determine whether the orders are genuine. If the orders are placed in key areas of concern to both buyers and sellers (such as important support or resistance levels), spoofing can be very effective.

Let's take Bitcoin as an example. Let's assume that $10,500 is an important resistance level for Bitcoin. In technical analysis, "resistance" refers to an area where the price reaches a certain "ceiling," a point where traders expect to sell. If the price is intercepted by the resistance level, the market is likely to fall sharply. However, if the resistance level is broken, the probability of continuing to rise is greater.

If the spoofers realize that $10,500 is an important resistance level, they will likely have their bots place spoof orders slightly above that value. Buyers will not actively buy at such an important technical level if they observe selling above it. In this way, the spoof can effectively manipulate the market.

It is also important to note that spoofing can sometimes affect different markets related to the same underlying asset. For example, if there are a large number of spoofing orders in the derivatives market, the spot market for the same asset will also be affected, and vice versa.

When is spoofing less likely to work?

When the probability of unexpected market fluctuations is high, scammers are likely to suffer the consequences.

Suppose a trader attempts to sell at a resistance level through spoofing. Once the market rebounds strongly, retail traders are affected by the fear of missing out (FOMO), causing large market fluctuations, and the spoof order may be quickly filled. Obviously, the spoofer does not want to see this result, and they did not intend to trade at this point. Similarly, if there is a short squeeze or flash crash, the market may execute a large number of orders in a few seconds.

When market trends are driven primarily by the spot market, the chances of a spoof being successful decreases. For example, if the spot market is driving the rally, indicating strong interest in traders buying the underlying asset directly, a spoof may be less likely to succeed. However, much depends on the specific market environment and many other factors.

Is spoof trading illegal?

Spoofing is illegal in the United States. The Commodity Futures Trading Commission (CFTC) is responsible for monitoring spoofing in the stock and commodities markets.

The United States enacted the Dodd-Frank Act in 2010, and Section 747 stipulates that spoofing is illegal. This section stipulates that the CFTC has the authority to regulate the following entities:

Behavior that demonstrates willful or negligent disregard for trading order during the closing period; or, behavior suspected of "cheating" or what is commonly known in the industry as "spoofing" (attempting to withdraw an order or quote before a transaction is completed).

In futures markets, it is difficult to classify order cancellations as spoofing unless they are frequent, so regulators must consider the intent of traders before questioning, charging or fining them for potential spoofing.

Other mainstream financial markets, such as the United Kingdom, also impose strict regulations on spoofing. The Financial Conduct Authority (FCA) in the United Kingdom is responsible for fining traders and institutions involved in spoofing.

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Why does spoofing have such a bad impact on the market?

As shown above, spoofing is illegal and often has a negative impact on the market. Why? Spoofing can cause prices to change in a way that does not reflect true supply and demand. At the same time, the spoofer can manipulate price movements and profit from it.

Some time ago, US regulators also expressed concerns about market manipulation. Before December 2020, the US Securities and Exchange Commission (SEC) rejected all proposals for Bitcoin exchange-traded funds (ETFs). If approved, ETFs could create opportunities for the US market and attract many traditional investors to trade assets such as Bitcoin. There are many factors for regulators to reject proposals, one of which is that they believe the Bitcoin market is likely to be manipulated.

As the Bitcoin market matures and liquidity and institutional participation increase, the status quo may change.

Summarize

Spoofing is a method of manipulating the market through fake orders. Identifying spoof trading has always been difficult, but it is not impossible. When evaluating whether a buy/sell order is suspected of spoofing, a holistic analysis of the intent behind the order is required.

Any market would like to minimize the adverse effects of spoofing, as this can create a relatively fair environment for all traders. Regulators often cite market manipulation as a reason for rejecting Bitcoin ETFs. Therefore, reducing spoofing is beneficial to the long-term development of the cryptocurrency market.

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