Author: Joseph Young
Abstract
Spoofing is a form of market manipulation in which a trader entrusts false buy and sell orders and ultimately deliberately withholds the order make a deal. Spoofing is usually accomplished using algorithms and robots in an attempt to create false supply and demand and manipulate markets and asset prices.
In many mainstream trading markets such as the United States and the United Kingdom, spoofing is illegal.
Many people say that large traders and whales manipulate the market. This statement is easy to refute, but most of the well-known market manipulation methods require large amounts of currency holdings. In this article, we will introduce in detail the fraud technique of "spoofing".
Scamming refers to placing false orders to buy and sell assets such as stocks, commodities, and cryptocurrencies in an attempt to manipulate the market. Traders who defraud the market generally use robots or algorithms to automatically place buy and sell orders. When the 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 into judging buying or selling pressure. For example, a spoofer may place a large number of fake buy orders in a certain price range, creating an urgent need to buy the asset in the market. As the market approaches that point, they quickly withdraw their orders, causing the price to continue falling.
The market reaction to spoofing orders is usually strong because it is difficult to determine the authenticity of the order. If orders are placed in key areas that buyers and sellers pay attention to (such as important support or resistance levels), spoofing may have very good results.
Let’s take Bitcoin as an example. Let’s say $10,500 is a significant resistance level for Bitcoin. In technical analysis, "resistance" refers to the area where price reaches a certain "ceiling", which is the point at which traders expect to sell. If the price is intercepted by the resistance level, the market is likely to decline sharply. However, if the resistance level is broken, the probability of continuing the rise is greater.
If the spoofers realize that $10,500 is an important resistance level, they are likely to have the robot place a spoof order at a point slightly higher than that value. Buyers who observe selling above such an important technical level will naturally not buy aggressively at that level. In this way, spoofing can effectively manipulate the market.
It is also important to note that spoofing sometimes affects different markets related to the same underlying asset. For example, if a large number of spoof orders appear in the derivatives market, the spot market for the same asset will also be affected, and vice versa.
When the probability of unexpected market fluctuations is high, fraudsters 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 spoofing orders may be completed quickly. Obviously, the scammers did not want to see this result, and they did not intend to trade at this point. Likewise, if a short squeeze or flash crash occurs, the market could execute a large number of orders in a matter of seconds.
When market trends are driven primarily by the spot market, the chance of successful spoofing decreases. For example, if the spot market is driving up, indicating strong interest in traders buying the underlying asset directly, spoofing may be less likely to succeed. However, much depends on the specific market environment and many other factors.
Scamming is illegal in the United States. The U.S. Commodity Futures Trading Commission (CFTC) oversees spoofing in the stock and commodity markets.
The United States enacted the Dodd-Frank Act in 2010. Section 747 stipulates that spoofing is illegal. This section stipulates that the CFTC has the authority to supervise the following entities:
Exhibit intentional or negligent disregard for the order of trading during the liquidation period; or, suspected of "deception" or generally being used by the industry This behavior is called "spoofing" (attempting to withdraw an order or quote before the transaction is completed).
In the futures market, unless cancellations are performed frequently, it is difficult to classify cancellations as spoofing. Therefore, regulators must consider the intentions of traders before questioning, charging or fining potential fraud.
Other mainstream financial markets such as the United Kingdom also implement strict supervision on fraud. The UK Financial Conduct Authority (FCA) is responsible for fining traders and institutions involved in spoofing.
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As shown above, spoofing is illegal and often has a negative impact on the market. Why? Spoofing may result in price changes that do not reflect true supply and demand. At the same time, scammers can control price movements and profit from them.
Some time ago, U.S. regulatory agencies also expressed concerns about market manipulation. Prior to December 2020, the U.S. Securities and Exchange Commission (SEC) rejected all Bitcoin exchange-traded fund (ETF) proposals. If approved, the ETF could create opportunities for the U.S. market and attract many traditional investors to trade assets such as Bitcoin. Regulators rejected the proposal for a number of reasons, one of which was their belief that the Bitcoin market was likely to be manipulated.
As the Bitcoin market matures and liquidity and institutional participation increase, the status quo may change.
Spoofing is a way of manipulating the market through false orders. Identifying fraudulent transactions has always been difficult, but not impossible. When assessing whether a buy/sell order is suspected of spoofing, a comprehensive analysis of the intent behind the order is required.
Any market hopes to minimize the negative impact of spoofing, because 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 transactions is beneficial to the long-term development of the cryptocurrency market.
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