What is spoofing in trading?
In one line: Spoofing is placing large buy or sell orders you intend to cancel before they fill, to trick others about supply and demand. It's illegal in US markets.
The idea in plain words
Picture a crowded auction. Someone shouts "I'll pay a lot!" to get others bidding, then quietly leaves before paying. That's the spirit of spoofing.
In markets, a spoofer puts a big order into the Order book, say a huge buy order just under the price. Other traders see it in Level 2 data and think there's strong demand. Prices drift up. The spoofer sells into that move, then cancels the big buy order before anyone can trade with it.
Is it legal?
No. The Dodd-Frank Act of 2010 added an explicit ban on spoofing to the Commodity Exchange Act: bidding or offering with the intent to cancel before execution. The CFTC and the Justice Department bring the cases. In stock markets, the SEC treats spoofing as illegal market manipulation. It can bring fines, trading bans and prison.
Real cases
- Navinder Sarao, a UK trader, pleaded guilty in 2016 to spoofing and wire fraud in E-mini S&P 500 futures. Authorities said his activity contributed to the conditions of the 2010 Flash Crash.
- JPMorgan agreed in September 2020 to pay over $920 million to settle US cases over spoofing in precious metals and Treasury futures by its traders.
A simple example
Price sits at 100.00. A buy order for 5,000 contracts appears at 99.75, much bigger than anything else. Traders lean on it as "support." Price ticks up. Then the big order vanishes in a blink, and price slides back.
What it means for you
You can't stop spoofing, but you can avoid being steered by it:
- Treat any one giant order in the book with suspicion. It may not be real.
- Base your Stop loss and entries on where price actually turned around on the chart, not on orders that can vanish.
The order book shows what people say they'll do. The chart shows what they actually did. Weight the chart more.
Our support and resistance guide shows how to mark the real turning points.
Questions
Is spoofing illegal?
Yes, in US futures and stock markets. US law specifically bans placing orders with the intent to cancel them before they fill.
Is canceling an order spoofing?
No. Canceling is normal. Spoofing means placing the order intending to cancel it all along, to mislead others.
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