Financail Times article on spoofing. The SEC and Finra are taking it seriously.
5 Things to Know About Spoofing in Financial Markets
“Spoofing” is an illegal type of market manipulation that works like bluffing: A trader places big orders for stocks, bonds or futures to get others to think the price is going up or down. Then, in the blink of an eye, the spoofer cancels those orders and puts in opposite orders to take advantage of those traders. Spoofing can earn a big payoff but can undermine confidence in the markets and hurt other traders, The Wall Street Journal reports.
22 FEB 2015 10:36PM
BY BRADLEY HOPE
1 It skews the market
Spoofing undermines confidence in the markets because it can make prices move erratically and lead investors to feel tricked, analysts say. Some firms have developed software to red-flag suspected spoofing to avoid getting duped.
2 Government is cracking down
The 2010 Dodd-Frank law outlawed spoofing. Last year, the U.S. Attorney’s office in Chicago brought the first criminal case against an alleged spoofer. The announcement sent a shockwave through the trading community because traders usually face fines and trading bans, not prison time. Michael Coscia, the accused spoofer who denies the charges, is facing 12 counts of fraudulent and manipulative trading. The U.S. Attorney and a lawyer for Mr. Coscia declined to comment on the case, which is pending.
3 Lines are blurry
One problem traders and their lawyers are worried about is whether legitimate market activity could get swept up in anti-spoofing rules. Since time immemorial, traders have used techniques to hide their intentions. For instance, a trader on behalf of a company that needs corn could theoretically start out by saying he wants to sell rather than buy to avoid other traders catching on to his plan. Some seasoned traders have gone so far as to defend spoofing as healthy for markets.
4 Spoofing can be manual or automated
Recent cases against spoofers have highlighted the way that some high-frequency traders, who use computers to send a rapid stream of buy and sell orders into the market, engage in spoofing. But some investigations by regulators show point-and-click traders can also allegedly spoof the markets.
5 It can earn big profits, or deal losses
A seasoned spoofer can earn tens of thousands of dollars or more in days. But it requires a special ability to read the market at high speeds and, increasingly, technology that can help zip in and out of the markets. Spoofers have been known to lose huge amounts in short periods.
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