Spoofing Is a Silly Name for Serious Market Rigging

Spoofing is a new crime but it isn’t new. It has a silly name but it’s no joke. Spoofers trick other investors into buying or selling by entering their own buy or sell orders with no intention of filling them. Long considered disreputable but rarely dangerous, spoofing has emerged in an era of computerized trading as a threat to market legitimacy. The US Justice Department and Commodity Futures Trading Commission have nabbed day traders operating out of their bedrooms, big Wall Street banks and sophisticated high-frequency trading shops. In August, two former JPMorgan Chase & Co. precious-metals traders were given prison sentences for market-rigging conduct that contributed to the bank paying $920 million in fines.

1. What is spoofing?

Manipulation of the market through the use of fake orders — that is, orders that are not meant to be executed. Placing fake orders lets spoofers nudge markets by creating a false picture of supply and demand, which moves prices in favorable directions.

2. What’s the history of spoofing?

Traders have always sought to use bluffs to gauge where prices were heading. What’s changed is that they no longer stand face to face, buying and selling with hand signals on trading floors. Now they watch numbers on a screen. When trading was done in a pit, bad behavior was easier to identify and avoid. In the electronic age, computer programs can flood markets with fake orders. In one case, a trader was accused of changing or moving futures contracts more than 20 million times while the rest of the market combined totaled fewer than 19 million actions.

3. What harm does spoofing cause?

Regulators and exchange operators think rooting out spoofing is important in convincing investors that markets are fair. In the US stock market, the Securities and Exchange Commission has had the authority to punish spoofing as a civil violation since the 1930s. To help police futures markets, which are overseen by the Commodity Futures Trading Commission, the Dodd-Frank Act defined spoofing and made it illegal in 2010. Some traders argue that the definition of spoofing remains too vague, making it hard to distinguish it from legitimate order cancellations. (It’s perfectly legal for a trader to change her mind.)

4. Who’s been charged?

Since spoofing was made illegal, the government has extracted more than $1 billion in fines for banks and filed criminal charges against dozens of individuals, using trading records and internal bank chat logs as evidence. Two former precious-metals traders at BofA’s Merrill Lynch were found guilty of spoofing by a jury in Chicago in 2021. In 2020, two Deutsche Bank AG traders were convicted, while others reached plea agreements and cooperated with authorities. The most infamous spoofer was Navinder Singh Sarao, a British day trader who pleaded guilty to spoofing after being accused of contributing to the 2010 Flash Crash in US stock markets.

5. What did the JPMorgan case involve?

In September 2020, JPMorgan admitted wrongdoing and agreed to pay more than $920 million to resolve charges filed by the Justice Department of market manipulation in both precious metals and Treasuries. It was by far the largest-ever sanction against a bank over spoofing. JPMorgan also agreed to help the Justice Department prosecute its former employees. Three of them, including the onetime head of gold and silver trading, were convicted of fraud involving spoofing or market manipulation, and another was acquitted.

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