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Re:Why Is Spoofing Bad? by kasey_junk on Thursday April 23, 2015 @07:26AM (#9425953)
People use the term spoofing in an overloaded way:

1) As this article describes, spoofing is the use of orders to change the perception of the supply and demand of an instrument. It is often also called layering (a term that is also overloaded). It does not involve mass amounts of orders or cancels. In fact, good spoofers go to great lengths to make their order flow look identical to someone who has regular trading intentions.

2) Spamming lots of orders into an exchange for some nefarious purpose (I've heard this described as a DDoS on the exchange). Which is both widely over reported (to the point that I believe it is largely urban myth) and trivial to detect and prevent on the exchange side (the exchanges know exactly who is sending the orders, the specific order gateways have rate limits, etc).

Finally, exchanges do penalize market participants that cancel too many orders. This is typically done via a fill ratio (the % of orders to those that trade) and enforcement can be either in the form of price levels, fees or potentially banning from the exchange.

Re:Why Is Spoofing Bad? by yummyfajitas on Thursday April 23, 2015 @10:25AM (#9426857)
To make it more complicated, there are people who run bargain hunter strategies - people who deliberately place orders way outside the NBBO in the hope of getting fills at really good prices. E.g., I'll buy TWC at $140 but not it's current $148.

This is functionally identical to spoofing except that these people are explicitly hoping to get a fill. (Hence it's legal.)

Re:Why Is Spoofing Bad? by tptacek on Thursday April 23, 2015 @10:41AM (#9427016)
Question: Matt Levine keeps pointing out that this is some rando in a track suit working from his basement in London, and MF Global is providing him with execution services for ostensibly zillions of dollars worth of orders. There's no way he could have taken fills, right? The trading intent was fiction, but so was the trading capability, right?
Re:Why Is Spoofing Bad? by kasey_junk on Thursday April 23, 2015 @10:55AM (#9427133)
This is where the "intent" of spoofing becomes very very murky. There is a trading strategy called laddering (or sometimes confusingly layering) where a market maker will put orders at many levels of the order book at once (and sometimes at extreme depths, like 100s of levels). If they were to get swept in one direction there is absolutely no way they could trade all of those levels (their risk controls would kick in long before that). But, if the fills come in the correct order (ie 1 buy/1 sell) then the market makers would happily trade all of them.

Its even worse in pro-rata matched markets because participants will often put orders in at much higher quantities than they actually want to trade, so that they can get any of the fills. That is, they'd love to get filled for 100 contracts, but are putting in orders for 10000 contracts in order to get any of the matching. Again, if that filled in the proper order they'd happily trade it, but if not they don't want to.

So in both cases, spoofing and not spoofing, the actual ability to honor the orders is in question. So that in and of itself is not evidence of spoofing.

The difference (I believe) is that the market makers in the laddering cases would LOVE to trade every single one of those orders if it came in the right order and are not intending to change the markets behavior with the placing of those orders.