By Larry Wright
If you have ever invested in a financial market, then you already know that it is a game of chance and controlling volatility. If an asset is showing promising returns on a dedicated day, then it isn’t a surety of that consistent performance because sooner or later, volatility is going to kick in, and that is never a pleasant sight. Apart from volatility of the assets and ups and downs that the market experience, there is an intentional manipulation technique that hackers and traders with ill intent use to tip the scales of the market in whatever position or direction they like; this is known as spoofing.
Spoofing is a rather broad term, and it applies to the context of financial markets in general; it means that forex, stock, and even crypto market is not completely free from the terrors of spoofing. Spoofing occurs when a trader with bad intent places multiple buy or sell orders that are completely fake, which means that these are not initiated by a reputable crypto exchange or an issuing authority but are completely out of the blue and fake.
The intention of the trader is that these orders that they have created, whether these are for buy or sell, must never get fulfilled by the market. Usually, multiple algorithms and bots are used for the sake of manipulating the market and prices of certain assets by developing a false situation for either supply or demand. It goes without saying that spoofing is completely illegal and is frowned upon in major financial markets, but alas, it is something that is part of the system, and people do take advantage of the market by creating these fake orders that are destined to never be fulfilled by the market.
Most of the people that you might come around will talk about how whales and traders who perform at a specific peak manipulate the market to their own advantage, they are able to do so by either shortening the market, investing in a particular commodity, or creating a positive demand for a dedicated asset. But never ever there is much talk about spoofing and just how it is damaging the markets along with the trade that is taking place over there. But to be able to launch a spoofing attack, the trader in question must have large holdings to their name, or otherwise, it won’t work.
A Brief Introduction to Spoofing
As explained earlier, it is a technique rather than being a phenomenon in which bulk orders are placed for either buying or selling the assets, and these can be stocks, cryptocurrencies as well as commodities. These are fake orders which means that these are not and will never be fulfilled by the market in any capacity, and only the trader that has placed the fake order knows this but not every other person or trader attempting to study the dance of the market to chip in their own investment knows so. That is why when they see such a huge amount of orders that are coming for either buying or selling of these assets, they kind of spook away because they think if a specific asset is being sold like crazy, then obviously its demand will be through the roof.
What they do eventually is put all of their money and investment into buying that specific stock, crypto, or commodity. And when they see too much of that asset being sold, then they ultimately think that the value of that specific asset is going down like crazy, which means that it might short in the upcoming future, and that is why they should end their investment positions. But what these regional traders don’t know is that these orders are placed by traders with bad intent who use bots or algorithms for the sake of placing these orders. Presently the technology is not sophisticated enough to discern between an order that was placed by a bot or an actual human being. So what happens here is that when these orders get a little too close to getting fulfilled, the bots will ultimately cancel the orders. Therefore, saving the person who had initially started this whole dance while becoming an ill-fated journey for others who thought these orders to be true and of significant value.
Spoofing creates a false impression that is not authentic in any capacity, but the sole advantage that the trader has in that regard is no one can differentiate between genuine order and a fake one. This manipulation is a sad truth that continues to emerge even in this modern era, and people are somewhat tricked by this false sense of demand or supply. So even when the trader pulls out their order, the price for that specific asset continues to decline or increase depending upon the type of order that was placed and the scenario that was created.
Spoofing as a Form of Market Manipulation
As explained earlier, the market responds very well to spoofing orders because there isn’t much of any screening parameter in place to discern the fake orders from the real ones, and that is where traders with bad intent really find their footing. They know that there is no possible way for the markets to discern between a real or fake order, so there is no probability of them being caught. Spoofing can be highly effective in manipulating the market, especially if a specific asset that is talk of the town at the moment is chosen and the orders are placed at a specific interval which is of massive interest for buyers and sellers at that specific time.
Take into account a cryptocurrency such as Bitcoin and assume that there is a resistance level at which the crypto has found a strong ceiling, and no one knows what the next move might be. Bitcoin might break this resistance level and rise to the occasion with steep progress joining the crypto in the upcoming days, or it might slip below this resistance level absorbing more and more downtrends as it continues its descent. Now obviously, this is an extremely significant resistance level, and it is of equal interest to both buyers and sellers.
Now suppose a Spoofing attack has commenced and has targeted this specific resistance level at which Bitcoin resides; the trader might place an order for a huge buy or sell position. Whatever they do, they will be able to manipulate the market because no matter in what direction the market moves, they will already be able to get what they were after. If the resistance level breaks down and Bitcoin is able to rise up to the occasion, then it means that the trader placed a huge order for Bitcoin buying, and that is why massive interest is being sparked among the buyers because they are thinking that Bitcoin is going to rise and that is why they should put down their money Bitcoin as soon as possible.
On the other hand, if Bitcoin slips below the resistance level, then it means that the trader might have ordered a huge sell-out for Bitcoin and created perfect chaos within the market and confusion where everyone thinks that Bitcoin is going to dwindle and lose its value so it would be wiser to chip out their Bitcoin tokens and clear out their position when there is still time.
No matter what happens and in what direction the market ultimately decides to move into whenever the buyers or sellers are getting close to fulfilling that specific order placed by the trader. The bots will cancel the order, thus leaving the market in a serious pickle, whereas traders are able to get what they originally wanted. It doesn’t matter which market is being chosen for the placement of a spoofing order; the echoes of this chaos will scream themselves into other potential markets as well. That is why whenever a spoof has been detected, the hums and beats of this madness can be heard in every financial market.
Effectiveness of Spoofing
Spoofing might be portrayed as something that doesn’t lose its effectiveness throughout this article, but that is not the case. Spoofing can actually be riskier and bite a trader’s in the back, especially in times of higher market volatility and unexpected movements taking place throughout the financial realm. Let’s suppose for an instant that a trader is interested in spoofing a particular resistance level, and they want to sell it to the people.
Now, if too many people take an interest in that particular order and they try to secure the position at that particular resistance level being clenched in fear of missing out, then the position would fail too quickly, and that is something the trader might not have thought about. This is not an ideal situation for the trader who initiated the spoofing attack because now he is in the game with the rest of the herd, and there is nothing that they can do to get themselves out of this position.
When a position for a particular order may be real or spoof gets filled, the person who initiated the order also gets entered in that particular sell or buy position whether they wanted to or not. Now suppose a flash crash happens right after the trader has tried to sell a spoofing resistance level; what would it mean? It means that each and every investor who invested their money into that particular resistance level thinking of making up a fortune have plummeted all of their investments and, along with them, the trader who initiated the spoofing attack.
When there is a sudden outrage and a bit of drama mixed up with a particular market where the interest of the investors is practically high for either buying an asset or selling it, spoofing becomes relatively ineffective. That is why the spoofer might try their best to initiate the attack when there is practically no activity going about within the market whatsoever.
This way, they know for sure that not many people would reach out to any order that they will open regarding either the setting of the asset or buying it. This is the most crucial way a spoof attack could become successful, and that is why not many try to manipulate the market when it is at its extreme, either in terms of selling an asset or buying one. But at the end of the day, the whole thing is practically dependent on a specific market environment and a bunch of other factors that accompany this specific trade.
Is Market Spoofing Illegal?
It goes without saying that spoofing is practically illegal within the United States and the US Commodity Futures Trading Commission is actually responsible for making sure that spoofing is nipped in the bud and doesn’t become a success by any practical means. The very definition of spoofing is when a trader initiates a transaction either for selling an asset or buying one without the intent of actually fulfilling it and canceling it at the very moment just before the transaction was to be executed.
That is why it is extremely unethical behavior on the part of the trader and must not be entertained with any kind of support whatsoever. It doesn’t matter what practical financial market we are talking about; it can be crypto, commodity, or stock market, but still, Spoofing is not legal in any of these by any practical means. In the crypto market, there is already a lack of regulation, and it opened certain doors for people to take advantage of the market positions during uncertain times. That is why regulators must jump in to determine the intent behind an order that was not executed or was canceled before they should write out heavy fines for the people behind this. There should be a practical algorithm or a software system in charge of tackling this kind of behavior while interpreting certain patterns that led to a spoof attack in the first place so that such behavior or pattern could be disheartened and frowned upon in the future.
Impacts of Spoofing on Financial Markets
Spoofing is practically illegal around the world, and it is considered an unethical approach to manipulate the market for one’s own advantage, thus wasting the fortune as well as time of many other sincere and honest traders. It has rather disturbing effects on whatever market it is unleashed upon, and that is why it is considered awhile at no matter in what capacity it is being practiced. Spoofing might initiate sudden price changes within the market about particular assets without an evident or sincere approach for demand and supply.
As spoofers are put in charge of these movements by their own proactive agenda, they can profit off of these dealings unethically. When they are manipulating the market for either selling the assets or buying a particular commodity, they are actually tricking the traders into investing a fortune into that specific order that they have already created. Now only they know that when push comes to shove, they are going to leave their position within the market. As they have left the position that they created in a false pretense, they can bet against that particular position which is destined to be doomed, thus making an enormous profit.
The Securities and Exchange Commission in the United States has taken necessary steps to make sure that spoofing can be restricted to its extreme not only within the crypto market but also in various other financial setups. With the launch of ETF or exchange-traded funds, giving people untapped access to the Bitcoin market without actually conducting business in crypto is another factor why these regulatory commissions and authorities should be on high alert for spoofing because this way, the investors that are not directly tied to the market are also being affected really bad.
With increased adoption and liquidity in the future, the possibility and probability of spoofing attacks might lower down and get rescinded. As explained earlier, to put an end to spoofing or a rather abject system or software needs to be developed that can sense the patterns and the very behavior of the users who are agreeing on transactions in large or mega quantity so that their intent behind this could be revealed. It is a little complicated to do so but not impossible at all to come up with; that being said thorough analysis of the orders that are placed within the market is required to put an end to spoofing and other likable attacks.
To be able to put a stop to spoofing is extremely desirable not only in the crypto market but any financial setup out there because it helps in streamlining and balancing out the investing environment of the market for everyone that is involved. Sooner or later, there is going to be a proper system that will help in identifying better or not, and order is spoofed, but until that it is advised to keep your eyes open and not spring at every opportunity just because it seems like one and also analyze the situation and read the signs a bit better to make your next move regardless of which financial market you are dealing with.