> The order finds that, from at least 2008 through 2016, JPM, through numerous traders on its precious metals and Treasuries trading desks, including the heads of both desks, placed hundreds of thousands of orders to buy or sell certain gold, silver, platinum, palladium, Treasury note, and Treasury bond futures contracts with the intent to cancel those orders prior to execution.
That's the definition of a spoof trade. [1]
> Spoofing is a form of market manipulation in which a trader places one or more highly-visible orders but has no intention of keeping them.
You are talking about spoofed orders.
A spoofed trade doesn’t really exist - the closest thing would be a wash trade, where you trade with yourself to make other people think a price is trading.
[1] https://constantinecannon.com/practice/whistleblower/whistle...
“Order” is before execution, “trade” is after.
No, Mr McDonald, it's quite the opposite. The important message is that if your organization can keep the profits from criminal activities higher than the penalties, they can perpetuate it. That's because there are virtually no other consequences for any individual criminals personally responsible for this, and none of them was persecuted, punished and forced to give up his ill-gotten gains.
I have no answers.
-Frustrated consumer protection attorney
So yeah also not the biggest punishment, but more then what these bankers got, they are still allowed to trade and no confinement.
Whether he was the only one to do it and whether he was the main cause of crash is not clear, but at least he had a part.
I personally feel like if you allow flash trading to have such an advantage over investors without those means it shouldn't be illegal to exploit it, but anyway.
It's a bit like killing a person using a gun and killing a person as a result of driving like the rules don't apply to you. Once it is established that you did the act, the first one undoubtedly puts you in jail for a very long time no matter who you are and the second one may get you a fine and no jail time so that no harm is made to your career(like the Qatari royal who killed a pedestrian in London).
Perhaps the government is lying about this, but at that point, you're just believing a conspiracy.
A cursor search shows that the fine is less than 10% of their last quarter NET income of 12.1 billion.
I would certainly keep doing illegal things if my only penalty was a simple fine like that every 10 years.
It's hard to not feel shocked when seeing numbers in the billions but you can't forget they are often accompanied by an equally shocking denominator.
Unless you are implying that JPM profited more than $172 million, the report suggests the government took the profits.
The fine should be ALL of the ill-gotten gains and then a naughty boy fine on top of it. To do otherwise means that you did not do justice.
Reputational losses are also a thing, agencies and whistleblowers will be paying a lot more attention to this sort of thing from JPMorgan from now on. Maybe a lesser effect would be morally conscious people (in finance haha) choosing not to work there.
Of course it is also possible that Chase PR machine greases the right hands to negate all of the downsides, and then you have a point that current political/regulatory climate is allowing this is be a profitable business model.
Jail time however, is not something everyone will want to gamble on.
So, it should be what you said + jail.
Better ways is to launder your ill gotten gains through property, let a few more respectable people take a slice of the cake like lawyers, property surveyors, etc etc and then it all becomes good until you become a political pawn.
Edit.
I should add, even when "entrapped" by the FBI with a few $million of coke and its recorded on hidden camera's you can still get off if you have been useful to the country or a few country's, in this case playing a part in reducing the troubles in Northern Island.
Let me introduce. https://en.wikipedia.org/wiki/John_DeLorean https://www.youtube.com/watch?v=edsAIPfw_dE And then Hollywood had their own idea's https://www.youtube.com/watch?v=Psxktpxkc6o
It seems the FBI were not the brightest, considering how geopolitics works, or are they mere attack dogs?
The DeLorean is 40 years old now!
I work in the industry and follow things like this and I haven't heard the US government saying they would like to charge JPM but they can't due to destabilizing the US financial system.
I'll even let you go back 5 years to find such a quote!! I don't think i've heard of this happening.
It's not exactly a secret that some market participants work out some kind of imbalance measure, and of you've ever implemented a system like that, like I've done, it will have crossed your mind that you could shove a load of orders in that mask the imbalance for everyone else. But you have heard of the spoofing rules and you don't do it. If we want a functioning market without a reputation for sharks, there's some rules to be followed.
Iirc they got a guy thrown in jail for this? Sarao or something like that? He had someone build him a spoofing machine and made a lot of money, though it's not clear to me how much was from doing this specifically.
In case you're wondering about that intention to cancel phrase, of course there are participants like market makers who do cancel a lot of orders. In that case it's a matter of them following the market in providing liquidity, they are not doing it to fool everyone.
I'm sure there are other anecdotes, but it left me feeling like at least this government org was doing what it was supposed to.
"Spoofing" simply means placing orders on the exchange orderbook which one supposedly does not intend to execute.
I've never understood this, because any bid/ask order on the orderbook CAN be executed against, until it is canceled. If they were "flashing" large bids/asks that were being immediately canceled to trick other algos into lifting, that is annoying but it's the algos that fall for the spoof that are stupid. The algos should just hit the large spoof bid and the spoofer will be left holding the bag.
Orders far from the BBO are clearly irrelevant and those close to the BBO are not "free" for the spoofer given they have to bear the risk that the orders could be filled if the market moves.
Effectively it means anyone cancelling an order has to worry that their action could be interpreted as "spoofing" - which will make market making more risky and expensive.
The only ones this type of enforcement "protects" are are those who naively think they've discovered a strong trading signal based on order volumes away from the BBO. Putting a $1 bid on a Rolex on ebay which is currently attracting $10k bids isn't going to fool anyone into thinking that demand is increasing and is relatively harmless.
For me real manipulation involves actual trades, not cancelled/unexecuted orders, and should be policed stringently. E.g. banging the market at close in order to nudge the closing price in order to boost the value of a position in a different book.
Can someone knowledgeable help me understand why these concepts seem missing from financial market penalties like this? The same people still have their license, and probably didn't even suffer a loss on the activity.
Disgorgement is the illegally gained profits they have to give up. The monetary penalty is the additional deterrent on top.
Does the deferred criminal prosecution mean, basically, pay your fine and don't do it again and you won't be prosecuted? So they really face no long term negatives if they gained more by knowingly breaking the law and paying a fine later?
Capital gains over last few years have been insane. The fine might be higher but a 400MM profit 5 years ago would have easily doubled just investing in SP500.
Similar things happen in retail all the time with no jail sentences, it’s just not algorithmic. “40% off but the offer ends in 3 hours!” is designed to mislead you into thinking there is a short-term mispricing of the product in a very similar way.
Or the real estate market, where basically every single price you see is a lie.
Or the used car market - it’s $15k, but when you go to pay you find out it’s $5k more to actually get the wheels or something.
If only any of these other markets were HALF as clean and transparent as the lit public order books (even if they were unregulated!) they would be massively better than they are now.
This law is unworkable and not sure if there's anything benefit in the end... as in crypto anyone who spoofs can have their bluff called anytime, so perhaps transparent free-for-all market is better for price discovery than pretending "spoof do not exist and are illegal".
OTOH, if I send 100 orders and then immediately cancel all of them, and especially if I do that repeatedly, I can't think of a legitimate reason for that; why not just use a single order? This matters because when those orders show up in the market data, I'll know that all (or most anyway) of them came from me, but other market participants will not know that those orders all came from the same participant.
This kind of behavior would not be difficult to look for in the market data, especially after the fact, so I don't buy the argument that laws which forbid such behavior are 'unworkable'.
Source: have been doing algorithmic trading for many years
A big negative incentive is law enforcement.
Otherwise you could make the same argument for literally every single other kind of crime. Someone does you wrong? Well there's a big incentive to straight up take their kneecaps. But you know, the law and whatnot seriously disincentivizes that kind of behavior.
> This law is unworkable and not sure if there's anything benefit in the end...
So surely you must be mad that JP Morgan got fined for this right? Supportive of Mr Dimon?
Good for them getting one over on ol' Joe Sixpack, right?
[edit] > as in crypto anyone who spoofs can have their bluff called anytime
Not at all, the overwhelming majority of crypto trading happens on centralized, trusted, opaque exchanges. Off-chain.
That's the role of shareholders AFAICT, to hold their board and the company accountable. Fail to do so and lose your shareholding seems the right direct risk.
The fines could also be a lot larger, because there is minimal risk of bankrupting a business from diluting existing shareholders. A 1% shareholder hit would be $4B at current market cap. Make it 5% and really make shareholders pay.
Either way you've lost 1%, but you can decide whether to hold the upside exposure and voting control.
I think the key is the size of the fine. $1B to JPM is not really a whole lot. Maybe scaling the fine according to the size of the entity might make sense, but then there's a question of why everyone else at JPM is getting fined simply for doing their job in the same building as the guys who did this.
Edit. On second thought I guess you mean there will be a restriction on buying back the shares?
Shareholders can change corporate behavior lik Carl Icahn but here it seems like it was very opaque to even monitor, the other way they can enforce good behavior is to sell the stock.
It's annoying to see, but not a big deal per se: your order book imbalance features just get weighted less heavily and you move on. ofc spoofing is illegal in tradfi, but if it wasn't, I kind of doubt it would even matter: market participants would adapt and the world would move on.
It's completely legal. If big financial institutions would risk fines and prosecution to do this is a market where it's illegal, what on earth makes people think it wouldn't happen in markets where it's legal?
> There are even tier 1 tradfi market makers who heavily engaged in not just spoofing but quote stuffing as well across crypto markets.
I assume you're alluding to Cumberland/DRW?
>Michael Coscia in 2013.
>Coscia was sentenced to three years in prison for spoofing futures markets using a specially designed computer program, making an estimated $1.6m (£1.2m).
If there are offers starting from 100,1 and bids starting from 99,9 but there is only one offer below 105 and many bids at 99,0 that is a valuable signal. From a 'random walk' perspective you would expect the price to rise quite soon. By spoofing you can either create this imbalance to get people to falsely trade on the imbalance, or you can hide this imbalance once you notice it so only you get to profit off the signal.
Hence, spoofing can be manipulative even if being a decent distance away from the current price, hence not running that much risk of the orders being filled.
Their only purpose here was to: "Through these spoof orders, the traders intentionally sent false signals of supply or demand designed to deceive market participants into executing against other orders they wanted filled. "
That being said, algos could have hit the large spoof bid, but imagine if it was legitimate, that would mean price movement against them and leaving them holding bags.
I think this is debatable. There's an ideal where no one spoofs and market prices are accurate at all times. But it's very difficult to enforce perfectly - there is no bright line test for whether you wanted a trade to execute or not, when you placed it. So in practice you are just always partially enforcing it and keeping the manipulation not too obvious.
The other possible solution is that anyone can place any order of any type any time they like, for any reason. The constraint is that if you place an order and it trades, you have to honour it. This leads to a situation where no one can trust the order book, but traded prices do reflect market truth - because of course no one wants to trade at an inaccurate price (not in their favour). The plus side is that it's much easier to make the system work. You don't have to run an arms race with people using sophisticated manipulation which can't yet be detected or prevented.
It's not clear whether order books giving (somewhat) accurate information is worth both the direct costs of enforcement and the potential unfairness of some spoofing rules being enforced and some not. It might be - but it's not clear that it definitely is.
I would guess that they sent a bunch of orders and them immediately cancelled them. If that's what they did, then by the time other market participants see those orders (remember network latency), the orders will already have been cancelled, in which case it would be literally impossible to trade against those orders after having seen them in the market data.
"Act fast because these are selling like hotcakes!"
"I've got another guy who wants to buy the car for $5k but I'd sell it to you for $6k if you can bring cash today."
"It's a buyer's market right now, so we should probably be willing to negotiate on the price as we sell your home."
If the going rate for a bar of chocolate is $1, and i add 100s of listings for a bar of chocolate at $1.10, then if you buy my spoof chocolate I’ll have earned 10 cents in arbitrage.
When you post an order to any exchange, you are doing so under the agreement that it is legitimate and that you actually want to be filled at that price. Obviously a participant’s desire desire to be filled at a specific price can change over time, so you’re allowed to cancel orders as well. That makes it difficult to detect and prove that a participant is acting maliciously. But if the BBO isn’t really moving and you keep posting/cancelling orders all day in certain patterns then eventually you’re going to get investigated and told to explain your behavior. And that’s where you might struggle to justify things.
> Effectively it means anyone cancelling an order has to worry that their action could be interpreted as "spoofing"
On human time scales, I think you’re vastly overstating the relevance of accidentally spoofing. For automated trading, yes you have to be careful that your signal doesn’t flicker right on the edge of your threshold. Sometimes that means you need to purposefully limit your order entry or sometimes it’s just a matter of improving your signal.
> The only ones this type of enforcement "protects" are are those who naively think they've discovered a strong trading signal based on order volumes away from the BBO.
I would say most of high frequency trading, which is the primary means of market making these days, relies on the state of the order book as a primary signal. Sure they incorporate other outside information, but when you’re trying to be the fastest, the only data you have to work with that is fast enough is the what the exchange says the order book is. No body’s paying attention to $1 quotes on a $10,000 stock. But a couple dozen price levels from the BBO on GOOG might easily be less 1% away and maybe spoofing there at large sizes might be enough to negatively affect HFT and cause spreads to widen, which hurts everyone.
Basically these regulation exists because only legitimate activity is allowed. Trying to fool other market participants (spoofing) or trying to slow down specific matching engines (quote stuffing) are obviously not legitimate.
> But if the BBO isn’t really moving
That might looks suspicious sure, but there may be other factors (not reflected in the book) influencing a change of desire on my part. For example, what if I only want to buy one of GOOG or APPL and optimistically stick in a low-ball bid on each. If one gets filled, I cancel the other. I never intended for BOTH orders to be filled; is this spoofing? Or half-spoofing? This isn't a real strategy but there are lots of strategies which can look like this.
I agree the state of the order book drives a lot of the behavior of a strategy (but other factors like current position are also critical) but I've never come across a strategy that responds to volume changes far from the BBO. Not to say they don't exist - it's a secretive industry after all - but the changes at or very near the BBO clearly reflect real intent and are weighted accordingly. Quantity change far away from the action is mostly noise.
And getting investigated by CFTC, and CFTC finding proof that you never intended to execute it AND you profiting from steering market in the desired direction which would not have happened without the fake trade...
No, it really doesn't. This is a single enforcement action that probably took months or years to put together. The behavior being policed is traders entering thousands of orders in a short period of time and then cancelling the orders after their real orders were filled, and then repeating this behavior over some period of time. Someone who fat fingers an order occasionally, or changes their strategy in response to intraday market movements has nothing to fear.
>For me real manipulation
Yeah those people also suck and I hope they get what's coming to them, even though I know they won't.
"these rules are stupid"
What never ceases to amaze me about free market extremists, is how much they take living in a civilised society for granted.
Try living in Russia where no-one is keeping fraud in check, you will quickly appreciate why we have these rules. A productive economy is imposible where every transaction could mean your savings dissapear into a black hole
I don’t think all rules are stupid, just these particular rules.
The reason I think the rules are stupid is that they don’t prevent fraud, they just prevent behaviour which is considered pretty legitimate in every other marketplace. Like, a spoofed ask price isn’t fraud - you can actually buy the price, and you will be filled.
There is no chance order spoofing will cause your life savings to disappear in a black hole. I think regulation to ensure that remains the case (ie around custody) is very important.
Is it fraudulent that you offer your house for sale, but when you get a few buyers willing to pay the asking price, you move the price up?
Not really. But that is WAY more manipulative than anything that is even POSSIBLE in the public markets, let alone what’s allowed. (The FX markets are an exception where this can happen on certain platforms).
I’m saying we tolerate these behaviours in every other market because they are not really fraud. It’s not lying to say you are bid and then cancel it later, so long as you honor any trades you do get.
One, there is no question that Sarao had nothing to do with the flash crash. The cause of the flash crash was a fund manager adding an extra zero to a trade they were making. The reason Sarao was blamed was to put pressure on him, and because the SEC needed to blame someone for there total failure to properly manage markets (the person who prosecuted the case against Sarao was the person responsible for monitoring electronic trading, she built a huge media profile through this case...no-one ever asked why the only person they charged for this was a disabled guy working out of his parent's bedroom).
Two, Sarao did go to jail in the US and the UK. This in itself was pretty unusual because he admitted to the crime, the crime had never been charged criminally, he explained to prosecutors exactly what he was doing, and he had relatively severe mental health problems which (given that he was totally compliant with prosecutors) should have meant he was never extradited (I believe he was in jail in Chicago, and he became very unwell whilst there). He was extradited to the US because prosecutors wanted to see him suffer (this is also why their first contact was a dawn raid on his parent's house), and it worked because he ended up signing a plea deal for something that he was very unlikely to actually get found guilty for (the case went on for something like 10 years).
Three, the reason why Sarao was charged was because people at HFT firms were losing money due to spoofing. That was it. The person who notified the SEC worked at an HFT firm. Ironically, Sarao himself also attempted to notify the SEC about things HFT firms were doing...nothing happened with that.
Four, people have been spoofing for decades. When markets were still a mix of open outcry and electronic, the largest traders were all spoofers. Saying that spoofing is illegal relies on the notion that once you enter an order, you must have the intention of trading at that price...do you know how to measure intention? The practice was only made illegal when the market went full electronic, and the order book data was being used by HFT firms.
Five, the reason why Sarao didn't go to jail was because the case against him made no sense. He was spoofing, spoofing is illegal but when the SEC raided him (again, highly unusual) he thought that the SEC was actually investigating his previous communications about HFT firms...it wasn't. He gave huge amounts of information to prosecutors about what large firms were doing, apparently he sat them down and went through hours of examples of market manipulation...no cases were brought as a result of this.
Sarao is the archetypal of example who was forced to serve real time at the behest of HFT firms in order to further political aims.
The story I remember was a popular documentary which had a story arch of a single trader single breaking the market from his parents bedroom. Which is a good story but most likely just a small part of the truth; also probably why the Wikipedia just mentions him shortly.
Exactly, in a similar manner that the PDT 4 trades in 5 days rule is implemented.
entering passive orders wasn't spoofing, but I was constantly cancelling orders. the difference between me and someone malicious was probably the frequency of my orders and how far from the midpoint they were - not vey frequent, and not very far. so its not a bright line.
The fine was levied against the entire company, not just their trading subsidiary.
>settling charges against JPMorgan Chase & Company (JPMC & Co.) and its subsidiaries, JPMorgan Chase Bank, N.A., and J.P. Morgan Securities LLC (JPMS) (collectively, JPM)
Why should you? Suppose you did a bad. Let's it was a side hustle where you took refurbished ipads and resold them as brand-new ipads. Over the past year you made $2000 in profit from doing so. The cops caught you doing it and fined you $10k. That sounds like a pretty serious penalty. However, you're also a bay area software engineer making $400k total comp, so $10k is a drop in the bucket. Should they fine you $200k instead, just because you happen to be a software engineer?
Yes, the fines should be punitive, not proportional to the damage.
> That sentiment was echoed as late as 2012 by Lanny Breuer, then the head of the Justice Department’s criminal division, who said in a speech at the New York City Bar Association that he felt it was his duty to consider the health of the company, the industry, and the markets in deciding whether or not to file charges.
https://www.theatlantic.com/magazine/archive/2015/09/how-wal...
And here is the 1999 memo from (then Deputy Attorney General) Eric Holder [2 PDF].
[1] https://www.justice.gov/opa/speech/assistant-attorney-genera...
[2] https://www.justice.gov/sites/default/files/criminal-fraud/l...
if those trades ran the risk of executing they would have probably been cancelled fast and moved further.
An order that doesn't execute is not associated with any trade.
JPMorgan were fined for spoofing orders not trades.
The likeness of this towards accidently killing someone while breaking the rules for driving falls apart using this reasoning as well since in that case the intent isn’t to kill anyone. In the scenerio comparing this however to bank robbery both cases have the intent to get money.
The car analogy would have been accurate if they did what they did without a specific target.
Actually, this isn't necessarily true. Example regarding the college admission scandal that demonstrates that just because a dollar wasn't "stolen", something of value was.
The admissions slots were stolen from the colleges and resold on the black market. Which is a crime, for good reason. We don’t have to act like there wasn’t a legal, primary market for the admissions slots already.
I think the key is not to understand this as a crime against other applicants, or the public, or “fairness.” It’s a crime against the schools.
The back door—“institutional advancement,” i.e., giving colleges tons of money—is fine, not because it is “fair,” but because the owner of the asset gets to decide the conditions of its sale. (The fairness of the front door is debatable too, by the way.) The side door is wire fraud, not because it is “unfair”—Singer says here that it’s one-tenth the price of the back door, which kind of seems fairer—but because consultants and coaches are misappropriating the asset and selling it for their own benefit. The law doesn’t protect fairness; it protects property.
https://www.bloomberg.com/opinion/articles/2019-03-13/you-ha...
https://twitter.com/jbarro/status/1105506383770894336
In the JPM fraud case specifically: (FTA)
Through these spoof orders, the traders intentionally sent false signals of supply or demand designed to deceive market participants into executing against other orders they wanted filled. According to the order, in many instances, JPM traders acted with the intent to manipulate market prices and ultimately did cause artificial prices.
Theft, by definition is when someone deprives the right of property from another person. Market participants should have been buying and selling at prices determined by the market. JPM manipulated that and created a profit as a result, thereby deprived other people from their profit.
So yes this is absolutely theft, just not the physical theft you're used to seeing when a robber walks into a bank and steals cash.
ah, the crux of the problem. we've veered much too far in this direction, and that's why we get absurdities like corporations stealing millions being punished much less severely than individuals stealing thousands. the law should primarily be about protecting people, not property (or corporations).
Maybe it's time to make financial-crime penalties a bit harsher.
The argument was that the way he was driving, we was accepting death. Like somebody shooting with a gun into a crowd.
https://www.lto.de/recht/nachrichten/n/lg-berlin-529ks6-20-k...
Can we call it "shooting like rules don't apply to you"?
"one is theft the other is simply breaking the rules"
The other is fraud, also a crime.
There was a lesson in the new employee training on sexual harassment (for sales people, but still a general lesson) - don't bring a client to a strip club. A higher up sales manager had actually done this in the london office and it was posted on memegen, and mentioned that this was literally in the employee manual. Lesson: be a manager.
Lesson: be a bank. The more corrupt, the better (HSBC). Until another Hitler comes along and does something about it.
> That sentiment was echoed as late as 2012 by Lanny Breuer, then the head of the Justice Department’s criminal division, who said in a speech at the New York City Bar Association that he felt it was his duty to consider the health of the company, the industry, and the markets in deciding whether or not to file charges.
https://www.theatlantic.com/magazine/archive/2015/09/how-wal...
It’s already a big problem that politics attracts more and more crazy people and reasonable people are staying away.
The real problem with market stability is nanosecond liquidity and HFT firms that will pull liquidity when things get dicey. Spoofing largely doesn't occur anymore, and you still see huge swings in prices because the liquidity isn't there anymore...investment banks have been regulated out the market, HFT firms flee at the first sign of trouble, there are relatively few speculators willing to buck the market anymore.
As I see it, the main problem with spoofing is that it distorts the market information. Any trader, human or machine, can look at the current order book and assume it is somewhat bona fide. Without that, exchanges are just a random draw (more than otherwise). Hence the appeal of dark pools (well, at one time) etc.
If you place the spoof orders knowing that and trying to create that behaviour then yes it's lying, but with extra steps.
I think your example would easily satisfy regulators. But you have to have the logging with real time stamps to prove it or you need to be able to reconstruct the internal state by replaying the market data against that version of the code.
Same goes for other pairs trades or other non-book signals. For any automated trading on regulated exchanges, you need to be able to explain to regulators why you chose to send an order. Otherwise you’re basically admitting that you don’t understand / have control over your algorithm, which they will obviously object to.
> I've never come across a strategy that responds to volume changes far from the BBO.
I agree it’s unlikely that a deep quote will provoke an immediate action. But sustained changes in the book will over time get aggregated into moving averages etc and influence behaviors in the long term (for whatever timescale may be appropriate).
> Quantity change far away from the action is mostly noise.
I agree that individual quotes are noisy, and it’s hard to extract signal from the noise. A limit order book by definition is supposed to quantify an aggregated demand to buy/sell, and thus it should be meaningful to aggregate over it to construct a distribution. Spoofing distorts that.
No one gets investigated for spoofing for sending a single order. It’s a persistent pattern that stands out from the noise.
That was kind of my point - the example scenario is clearly legitimate. The problem is that if spoofing is defined as submitting an order with no intent for it to execute, then in that scenario, that's exactly what I've done (for one of the orders).
So sure, it's seems clear that I should get a pass for doing it just once. What if I was doing a trade like this every day or tens or thousands of times a day? To the other participants, it looks like I'm flooding the book with orders which 50% of the time just get pulled for no apparent reason. The rule is supposed to protect other participants from being confused by such quotes, no?
Btw, I think it just muddies the waters by bringing up automated trading and the charge of "not having control over your algorithm" which is distinct from the specific charge of order spoofing. Whether the orders are entered manually or by a program does not fundamentally change their 'spoofyness' to other participants.
The fundamental issue I have is there is no quantifiable or clearly stated difference between spoofing and legitimate exposure control. I dislike laws which are so vaguely defined that the only way to remain law-abiding isn't to avoid specific behaviors but to avoid attracting any attention from the authorities.
An order placed, whose entire purpose is to elicit a reaction from others, is clearly spoofing. the spoofer would be unhappy to get filled at all.
I missed this earlier, but it's not a good argument.
It's all about risk-adjusted expected value. There's a distribution of payoffs to spoofing, and it skews far to the right. The conceptual categories of "free" vs "not-free", or "risky" vs "riskless" is the wrong mental framework for evaluating this problem. Yes, it's not risk-free, but why is that relevant?
This is just a restatement of the thing that I was questioning.
Yes, it's real according to the definition that you've put out. The spoof order can be traded against. So? Why does this binary real/not real categorization matter for whether spoofing should or shouldn't be allowed?
An intelligent spoofer isn't going to place large orders directly on the BBO when the fill probability is high. They're going to be doing it when the correlated markets aren't moving against their order, for instance. Or they're going to put it one tick below the BBO and algorithmically pull when a trade hits the level above. So even if they do get filled, which is unlikely if they're smart, it's no big deal since they've made lots of money up until that point and they can get out of the unwanted position without much slippage.
https://en.m.wikipedia.org/wiki/Activist_shareholder
The sibling comments have an interesting worldview: can't fine management cause it's not their firm, can't fine shareholders cause it's not their fault, its nobody's fault.
Afaik though, human traders have been spoofing on Eurex since the late-90s (Paul Rotter most infamously). And no-one looked at the order book and assumes it is bona fide because humans understand human reasoning, the issue was HFTs who use that as an input to their pricing model. You have iceberg orders, they are basically reverse spoofing, and it is how most institutions execute large trades...they don't put a huge order in one go because it will get picked off by HFTs, they break up the order into lots of 100 shares or whatever, so no-one uses the order book now anyway because HFTs will pick you off if you do (again, that is why spoofing was made illegal, the only way HFTs can pick you off is if a regulator has banned false bid/offers).
And how is that different from spoofing? If I know I need 100k shares but I am bidding 100 lots at a time then I am hiding my intention just like a spoofer (and btw, doing this will get you fined in some OTC markets...if you tell your broker I need 10k shares and you take his offer, and you then say you need another 10k shares then you get reported...at least it is totally clear in that instance that the rules exist to stop brokers losing money). Again, the market is run by HFTs who are just trying to make the most money by doing the least amount of work, part of which is tilting the rules in their favour so no-one can hide their intention from their algos.
Algos aren't smart. Thy automate human reasoning to the extent logically possible. If as a human you don't know how to detect a spoofed bid, then how do you make algorithm "smarter" than yourself?
The orderbook imbalance signal is a strong signal, but its not the only one...
(Full disclaimer: I worked as an algo quant at a large bank for 5 years. During which time I was constantly hounded by Compliance over supposed "spoofing", which we never did.)
The harmed parties are algorithmic traders that use L2 market data to adjust their theoretical value.