How Visualizing Order Book Depth Can Help as Spoofing Fines Hit Record Numbers
The CFTC recently released its annual Enforcement Report, which highlighted a number of notable 113 enforcement actions. Unsurprisingly, there was also a record number of spoofing fines.
Spoofing is not a new behavior, yet continues to be at the forefront of high profile enforcement actions and media stories. When it comes to spoofing, the more we see things change, the more we see certain things stay the same. The strategies, methods and frequency are constantly evolving, but at its core, spoofing is still the use of false orders to create a misleading impression of buying or selling pressure.
The Spoofing related prosecutions that have taken place across the globe over the last twelve months are a testament to this.
What are the key attributes of spoofing?
- Large orders on one side of the book only: A spoofing trader does not usually display large orders on both sides of the book. If the intention is to mislead others, to move the price, one must concentrate their orders on one side only, in order to drive the direction the other way.
- Direction of trade is always contrary to the weight of orders shown: Large bids while selling; large asks while buying.
- Transaction size is not reflected by order size: The large ‘spoof’ orders typically exceed the average transactions undertaken.
- Large volumes are rapidly removed after opposite side trade: The large ‘spoof’ orders are not intended to trade and are therefore removed rapidly after execution on the opposite side.
- Large volumes are often placed close to the best price: The large ‘spoof’ orders are not intended to trade, but are intended to give a false and misleading signal. Therefore they are often placed at or near the best price. In some cases, these orders can better the current best price.
Detecting the ‘Signature’ of Spoofing
Having the ability to ‘see’ into the order-book in this way is key to understanding a trader’s behavior. Simply looking at transaction data doesn’t easily allow the user to identify repeated patterns in the way that order book visualization can. By visualizing trading data and order book depth, compliance teams can provide evidence to demonstrate the intent behind the trader’s actions, to provide a visual representation of the behavior, and visually show any patterns. By visualizing the behavior using this view, and reviewing it over time, patterns become apparent, and the intentional nature of the activity becomes evident. Nasdaq provides this visualization via its ‘Depth’ view.
Unlike some of the high profile spoofing prosecutions from three to five years ago (e.g., Michael Coscia/Panther Energy), some recent examples do not appear to be a case of rampant and constant spoofing. In many cases, the activity is carried out once or twice a day, in between lengthy periods of trading with no apparent manipulative intent. However, whilst the activity is sporadic and not intense, the viewing of sample trading in the Nasdaq ‘Depth’ view clearly exhibited the ‘Signature’ of spoofing. This capability can provide Nasdaq customers with confidence that as long as their analysts are familiar with and focused on the signature attributes of spoofing, it can still be visualized even as the methods change.
Looking Ahead
With unprecedented market conditions, this year brought record market volatility, and with it, a record number of surveillance alerts. In order to effectively detect spoofing, firms must rely on experienced analysts who have a high-level understanding of the behavior. Large alert volumes can make spoofing difficult to identify, especially when looking for patterns over time. By having a tool that displays spoofing as a visual representation, users can be trained to look for the ‘signature’ of Spoofing behavior rather than relying on reviewing data alone. This could significantly speed up the alerts review process with the potential to increase revenue through resource reduction.
Other Topics
Market Regulation Technology
Alan Jukes
Nasdaq
Alan is a Principal Product Manager for Nasdaq Surveillance, working primarily on detection and investigation products.
Read Alan's Bio
MarketInsite
Nasdaq
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