Defining the Spoofing Meaning in The Stock Market

Before we define spoofing meaning, it has to be 100% clear to all our readers – the technique is illegal to use. Spoofing is a form of stock market manipulation when traders tend to place huge sell or buy orders without actually an intention to sell or buy assets. The main idea is to create the artificial market fuzz seen by other traders as high demand for a particular asset (for example, stocks, bonds, futures, and other traded instruments).

Spoofers make traders place hundreds or even thousands of orders on impulse driving them to the same asset they use for spoofing. As a result, the price keeps growing because of endless fake orders, while artificial inflation brings enormous profits to spoofers.

In this article, we will try to define spoofing meaning as well as the way it works. The information will help to prevent you from getting involved in false signals. Whatever you do, keep in mind that making correct market decisions is possible only with the help of in-depth technical analysis, indicators, and other instruments that guarantee a broader market overview.  

Spoofing Definition and How It Works

We have already said that it is a specific technique used to manipulate the market. No one knows when and where it originated from. Spoofers were first spotted back in 2010 when trying to manipulate newly-established computer-driven trading instruments. The same year, local regulators and law enforcement officials started taking drastic measures to prevent financial markets from spoofing.  

The idea is quite simple:

1. A trader places several highly visible buy orders without any intention to keep them.
2. Then, a trader places another order of the opposite type (sell) while the first one has just been canceled or is still active.
3. The buy order drives the price of an asset up, keeping sellers more active than ever and vice versa.

It helps to create market fuzz to manipulate the situation or drive traders’ attention from the targeted instrument. In other words, we can observe a series of offset trades that create the impression of a worthy market to enter with a buy or sell position. In reality, it is not that worthy after all.

Why Spoofing Is Illegal

Some countries have already taken drastic measures to detect spoofers. In the United Kingdom, local authorities have the right to fine them. The methodologies became illegal in the United States as well starting from 2010. Some beginners define spoofing to be the same as layering. However, the two strategies are a bit different. Layering refers to placing multiple orders for the same commodity at different prices.

Spoofing Biggest Fines and Criminal Cases

Authorities of some countries have already brought several high-profile cases and lawsuits. They include some well-established prosecutions and fines spoofers had to pay out for violating the rules of trading. Here are some of the most popular cases:

1. In 2013, Michael Coscia was fined $2.8 million by the U.S. Commodity Futures Trading Commission. What’s more, he was banned from trading for 1 year.
2. In 2014, the notorious “Russian” (Igor Oystacher from Chicago) was sentenced to pay the fine of $150,000 by the CME. Igor also got a 1-month ban from trading.
3. In 2018, a group of well-known financial institutions (HSBC, UBS, and Deutsche Bank) agreed to pay the $47-million settlement for the spoofing civil charges.

The Bottom Line

If you want to define spoofing meaning, you may think of it as bluffing. A trader places multiple orders and opposes them with new ones to manipulate the market and create an artificial noise to drive its price. However, it does not mean a spoofer has the intention to fill the order. What’s more, he or she may place thousands of new orders with smaller trades to keep the prices high. The technique is illegal in the majority of countries across the world. Besides, regulators and legislators work out advanced tools to detect spoofers, fine them, or initiate criminal and civil lawsuits. 

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.