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To spoof, or not to spoof, that is the question

Published in Automated Trader Magazine Issue 39 Q2 2016

Spoofers place orders with no intention to trade. They are accused of distorting the market. But if order books in mature markets do not contain information, why ban spoofing?

I've always hated spoofing, spoofers, and the concept of spoofing. I'm annoyed by their slings and arrows. I'd say the only truly appropriate punishment for a spoofer should be that old grotesque favourite of medieval torture, the rat torture. Though having rodents eat through your stomach, or other orifices, does seem to be letting the spoofer off a bit too lightly. A painful death seems too kind.

Things change

To spoof, or not to spoof? I'm no longer so sure of the answer. Perhaps a milder torture, such as water boarding, may be best. Then again, perhaps spoofing can be justified. I'm not sure I'm willing to back off that far but there is perhaps an argument for it. I think it may be worthwhile for you, too, to reconsider your position whether your thinking starts in favour or against. It is not as clear cut as it may seem. Here I wish to meander through my inner angst in public.

AUTHOR'S BIO

Matt Hurd has founded a high frequency trading firm followed by a trading technology firm. He specialises in integrating high level trading with low level technology. He has an MSc in Computing, which helped him with various previous roles in technology and trading in firms such as Bankers Trust and Susquehanna IG.

What is spoofing?

Firstly, lets get out of the way what spoofing is. Spoofing is the placing of an order in the market place without an honest intention to trade. Spoofing is a lie, expected to benefit the spoofer in some way. The reason many countries' regulators have a law against spoofing is because it is understood to be an unfair practice. Spoofing thwarts price discovery by distorting true market dynamics.

The classic example would be if Dr. Evil was short AAPL. Say she has been short for a few months. Now Dr. Evil has decided to buy to square off as her carefully constructed seismic event in Taiwan failed to have the market impact she hoped for. Dr. Evil can either cross the spread and lift the ask to buy and go flat, or wait on the bid with a limit or peg and hope the market will trade to her. Dr. Evil gets a better price with the second option but the market may not trade there. The eponymous Dr. Evil naturally decides to try to influence the market.

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