Spoofing is a type of high-frequency trading that involves placing and manipulating orders before they are executed. Most often, this technique is intentionally used in the financial markets. The financial hazard is prohibited in many countries, as it refers to a strategy of artificially manipulating prices. It is considered fraud, which negatively impacts the integrity and ethics of the trading process, with consequent negative economic results. The Dodd-Frank Act amended the CEA to consider this technique a damaging financial hazard. The anti-spoofing requirement, CEA Section 4c(a)(5)(C), states it is illegal for any individual to commit this fraud.
In June 2012, a Chicago trader decided to put the theory of spoofing into practice. In just half a day, Igor Ostaicher sent more than 23,000 commands to the broker to buy and sell shares of Brent oil. However, the trader immediately canceled the requests at short intervals. By generating a huge number of demands with the help of the bot, Ostaicher created the impression of market activity, thereby artificially inflating the value of the shares. He immediately canceled the requests, but the traders managed to disperse the quotes market even in minutes. Further, Ostaicher received a real active sale at an inflated price and a profit (Basim & Khaleel, 2018). This case reveals severe ethical violations that disregard the immunity and fairness of trade
Trade transparency largely depends on the ethical framework of the parties. Theoretically, a trader can cancel an order based on technical analysis or news with no specific intentions. In the case of Ostaicher, the CME exchange and the CFTC regulator immediately launched an investigation due to his clear intentions to complete a fraud. The trader did not get any serious fine; therefore, some preventive standards have been developed to prevent such a situation. And since 2014, the first legal allegations of spoofing have appeared. After the incident with Oystacher, who escaped with a small fine, companies have developed special software that tracks a large volume of applications (Basim & Khaleel, 2018). Regulators monitor traders’ mail and apply mathematical and statistical methods to eliminate any risks of spoofing.
This case showed the seriousness of this financial threat. Since then, a lot of work has been performed on creating an effective preventive program to track down spoofing. The Ostaicher situation was only the beginning of the market analysis on this matter. I believe that all such frauds should be timely stopped and financially disciplined. The market must remain a transparent place for exceptionally worthy activities.
Reference
Basim, H. & Khaleel, T. (2018). An improved strategy for detection and prevention IP spoofing attack.International Journal of Computer Applications, 975-8887.