Spoofing (Trading)
A form of market manipulation where traders place large orders they intend to cancel to create false impressions of demand or supply.
What is Spoofing?
Spoofing is a form of market manipulation in which a trader places large buy or sell orders with no intention of executing them, creating an artificial appearance of demand or supply that influences other participants' behavior. Once the spoofed orders have moved prices in the desired direction, the manipulator quickly cancels them and profits by trading in the opposite direction at the manipulated price. Spoofing is illegal under the Dodd-Frank Act of 2010, which explicitly banned the practice in U.S. commodity and securities markets, and the CFTC and SEC have both pursued enforcement actions. High-frequency trading firms have been scrutinized for spoofing-related strategies due to their ability to place and cancel orders in milliseconds. In the notable Navinder Singh Sarao case, the trader's spoofing activity in S&P 500 futures was identified as a contributing factor to the May 2010 Flash Crash.
Example
In the Navinder Singh Sarao case, the trader placed thousands of large S&P 500 E-mini futures sell orders that he never intended to fill, artificially depressing prices. He then bought contracts at the lower price and canceled the fake sell orders, pocketing the difference. He was convicted of wire fraud and spoofing in 2020.
Source: CFTC — Spoofing Enforcement