Spoofing as a method of fraud in the stock markets

спуфинг

The spoofing – setting in the terminal orders and their withdrawal before they will be removed. Interesting tool, used by professional traders in global markets working with a large amount of capital. For individual traders, the implementation of spoofing is impossible, except in some countries there is a legal ban on such actions, but you have to prove the fact of spoofing. But “forewarned is forearmed”! Seeing such applications, a trader can understand that someone deliberately undermines the market.

The flipping — the process of placing limit orders on one side of the market to create the appearance of market forces, as long as the second party gaining positions. Flipper can put limiters on the offers that will provoke traders to sales, he will sit on the bid and collect all sales. As soon as flipper receives an order, he takes the offer and starts to throw market orders in the market. Those who understand that they are trapped, will be pushing the market up.

Spoofing in practice

In June 2012 , one Russian trader without higher education, working in Chicago, decided to “trade” futures on Brent crude oil. In just 6 hours Igor Eustace sent more than 23 thousand commands, of which more than 1000 orders for the purchase and sale. However, most of these orders were cancelled after milliseconds (spoofing).

The investigation involved the leadership of the CME, which hosted the transaction, and the CFTC, Who saw fraud in the actions of the trader. In the Commission’s view these actions were specifically carried out with the aim to mislead other traders, and forced to make transactions at artificially high or low prices. The results of the investigation have been eroded. Part of exchanges of the USA has banned the trader on their sites, but the actual charges were not yet announced. The trader took a mediocre position, not denying but not acknowledging the true purpose.

To prevent spoofing, CME has issued a series of explanatory acts, and since 2014 began the first trial on the claims against traders engaged in this type of trade.

What is spoofing? Suppose that the market price of oil — of 45.12 USD per barrel. That is, the trader can buy oil at this price, but does not want to, and there are traders willing at this price. By placing orders to sell at price 45,08 trader creates a deceptive impression on the stock exchange, forcing other traders believe that the price of the asset falls. As a result, other traders are also beginning to submit bids for the price of 45,08, however, the spoofer then cancels his order for selling and quickly buying the asset at a price 45,08 those who fell into the trap and sells it when the price returns to equilibrium. Many of these deals can bring a good profit.

To prove spoofing, that is, purposeful action of the trader is difficult because there are many objective reasons why a trader can cancel an application:

  • news releases hint at a trend reversal;
  • technical (sudden) trend reversal;
  • changes in strategy, etc.

Experienced traders say that spoofing has long been used in the market, but to prove the actions of spoofer is difficult. In addition, they note that in a real stock and currency markets a significant part of the operations is spoofing, hinting that not always the market respond to fundamental factors. Some companies developed their own software, allowing on the basis of graphical analysis to determine the signs of spoofing. Supervisors for determining spoofing use statistical methods and checking mail correspondence of traders on the subject of the collusion.

Here are just a few facts from the investigation Eustacia, which remained unfinished:

  • Eustace working in the company Gelber, preferred tactics and aggressive high-frequency trading in futures. From Gelber trader left in 2010 and 2013, the company agreed to pay a fine of 750 thousand dollars. CFTC orders for 2009 and 2010 open and cancelled by an unknown employee of the company. The Commission felt that the order could affect stocks;

  • in 2012, Eustace with several traders within 1 day conducted fictitious transactions with 80 000 futures E-mini S&P 500 in the amount of 6 billion dollars. The Commission believes that this could affect the value of the contracts;

  • in 2011, the trader opened a buy order in gold, copper and silver in large quantities, but was not going to execute orders, quickly withdrawing them and placing the opposite.

In November 2014  SME brought the trader to a fine in the amount of 150 thousand dollars, but the current situation is unknown.

A separate investigation touched Eustacia trade on ICE, where 19-20.06.2012 he spent 23000 commands. The exchange provided information, which shows that in many cases the trader opened and closed positions almost simultaneously. In his explanation to the trader pointed out that “we click the mouse in response to market changes, and if we do it faster than others, it is a sign of professionalism.” ICE did not suit this answer and banned the trader from trading on the stock exchange.

The story of Eustacia is more than indicative, for the simple reason that just 2 years earlier there was another major example of spoofing, which ended in failure for a trader (unlike soft fine of Eustacia). In 2010 in accordance with the Dodd-Frank trader from new Jersey, Michael Coscia was charged with fraud by 6 points. According to the CFTC, the trader deliberately rocked the prices on the futures market (spoofing for high frequency trading). The verdict of 2.8 million dollars fine (trader agreed to pay for) and the threat of 25 years imprisonment (the sentencing is scheduled for March 2017).

Summary. Spoofing artificial manipulation of market prices. For the private investor the opportunity to recognize the spoofing is practically impossible, because such a situation should be considered, realizing that the trend is not always possible to predict by the indicators of technical analysis or to trade on fundamental factors.

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