What Is Spoofing in the Financial Markets?
Market manipulation by spoofing occurs when a trader places fake buy and sell orders, with no intention of those orders being filled. The purpose of Spoofing is to create a false impression of supply or demand on the market by using algorithms and bots to manipulate market and asset prices.
Many major markets around the world, including the US and the UK , have laws that regulate spoofing.
Introduction
Large traders and whales are often mentioned as manipulating the markets. There are a number of well-known forms of market manipulation which require large holdings, though much of what is said can be easily disputed. One such technique is spoofing.
What is spoofing?
Spoofing occurs when the false purchase or sale of a security, such as a stock, commodity, or cryptocurrency, is placed by a third party. Trading spoofing typically involves traders using algorithms or bots to make automatic purchases or sales of products. Orders are canceled by the bots as soon as they are close to fulfilling them.
Spoofing involves creating the impression that a buy or sell pressure is present under certain circumstances. A spoofer, for instance, may create a false perception of demand by setting up a large number of fake buy orders. It was then that they pulled the orders when the market got close to the level, and the price fell precipitously.
How markets typically respond to spoofing
Because it is difficult for the market to tell if a spoof order is legitimate or not, it often responds strongly to spoof orders. The use of spoofing is particularly effective when it is done in key areas of interest for both Traders, such as key areas of support and resistance.
As an example, let us consider Bitcoin. Suppose Bitcoin have a strong resistance level at $12,500. Generally, resistance refers to an area in technical analysis where prices encounter a ceiling. This might seem obvious, but it may also be where some sellers will place their bids in order to get their holdings off their hands. Price can fall sharply if it is rejected at a resistance level, for example. The rise in the price is not guaranteed to continue, but if it seems to break through the resistance level, there is a likelihood of it continuing upward.
It is likely that bots will place spoof orders slightly above the $12,500 level if that level appears to be a strong resistance level. If buyers see massive sell orders above a technical level with such importance, they might be discouraged from attempting to aggressively strengthen the level. As a result of spoofing, market manipulation can be accomplished with great effectiveness.
Despite the fact that spoofing is only effective if there are overlapping markets that are tied to the same underlying instrument, there are some things to note. In the derivatives market, large spoof orders may impact the spot market of a particular asset, as well as the other way around.
Why spoofing is not good for the markets
Spoofing is illegal and usually harmful to the markets as it distorts the signals. But why is spoofing so dangerous? As it stands, spoofing can affect the distribution of prices in a way that is not reflected in supply and demand. While these price movements are controlled by spoofers, they can profit from them.
Market manipulation has also been a source of concern for U.S. regulators in the past. By the end of December 2020, the U.S. SEC has rejected all Bitcoin ETF proposals. When approved, an ETF allows institutional investors to gain access to assets, like Bitcoin. One of the reasons that proposals are normally rejected is that the Bitcoin(BTC) market is considered to be susceptible to manipulation.
Although the Bitcoin market is entering a new phase of maturity as it gains institutional acceptance and increased liquidity, this trend may be changing.