Spoofing Introduction

Introduction

The FCA has issued a Warning Notice regarding alleged spoofing-type activities at a bank in 2016. There have also recently been a number of high profile “Spoofing” cases in the US, resulting in several convictions of traders. 

Spoofing is a form of market abuse which can sometimes be subtle, and hard to distinguish from “normal” trading”, and is therefore challenging to monitor.

However, there is a clear message from authorities that spoofing is market abuse and will not be tolerated - so the responsibility falls firmly on senior management to ensure that the level and quality of trader surveillance is adequately robust to prevent spoofing. 

This requires strong technological capability combined with knowledgeable practitioners, who have the capability to interpret trader behavior - and, importantly, to distinguish between possible spoofing and legitimate trading activity, thus preventing a multitude of false positives.  

 

What is Spoofing and how does it work? 

Spoofing is the feigning of interest in trading of futures, stocks and other products in financial markets, thus creating an illusion/misleading impression of the demand and supply of the traded asset.

It’s important to recognize that spoofing can be facilitated through traditional voice traders or via automated/algorithmic platforms.

Typically, it involves the placing of (sometimes multiple) bids/offers, but without the desire to actually execute those trades. Therefore, the orders are usually withdrawn just prior to actual trading managing to occur. 

Potential tell-tale signs of spoofing; 

“Pretend” bids:

There are numerous ways of engaging in spoofing activities - however, whichever mechanism is adopted, the essential aim is to mislead other market participants and users. At the simplest level, this might involve a single bid which is then withdrawn before a seller can execute. 

 There are a number of other spoofing techniques that may be seen, including;

“Layering” of bids;

-the submission of multiple bids (offers) at a variety of prices just below (/above) the current market price; this can serve to imply that greater depth exists in the marketplace and may therefore provide false comfort to would-be sellers that there are plentiful buyers at-and-around the then current price. It also implies the market is better supported than is the reality.

-additionally, the bids might be placed for very large trade-size, suggesting (misleadingly) the presence of a “big” buyer(s). 

Apparently erratic actions by the trader:

-the witnessing of unusual/erratic actions, including the submission of bids which are suddenly, and seemingly inexplicable, then withdrawal by the trader; this would suggest that there could be an attempt to create a “false market”, with no real appetite to actually trade. 

Unusually aggressive behavior by the trader:

-the trader may frequently engage  in aggressive dialogue with voice brokers, seemingly looking to be a buyer whilst in reality trading infrequently, and in smaller than usual size; this may be an attempt to deceive  the broker that the interest to buy is “real” when in fact it is a smokescreen. 

-trader actions could also include “dropping” the broker (ie reneging on the trade), in the event that a bid price is actually traded upon, as this is neither what the trader was intending or wanting to happen.  

Risks to the “spoofer”: 

Finally, it should be kept in mind that spoofing is not without its risks to the trader, as its possible that the traders’ bluff will be called - for example, the “pretend” prices could be traded upon before the trader has time to pull them out of the market. The trader is then left with a trade that was actually unwanted. 

FMCR has the practitioner experience and expertise to assist in creating a robust internal control environment to prevent spoofing and other market abuse activities.