6 ms·

Maybe I'm misunderstanding the case here, but why is spoofing orders a crime? If the answer is: because algorithmic trading computers get screwed up and try to

Maybe I'm misunderstanding the case here, but why is spoofing orders a crime? If the answer is: because algorithmic trading computers get screwed up and try to front run and buy the asset when they think there are buyers - I just can't feel sympathetic. Who exactly is the victim here?

mrfox321 6y ago
It's similar to questioning the morality of a scam artist who hires his friends to pretend to bid on something in front of the victim to influence them or drive up the price.
- doublesCs 6y ago
  Actually not a bad analogy, thank you.
- the_jeremy 6y ago
  It's worth pointing out that this holds true for the inverse scenario: dark pools (trading between large firms off-exchange) are legal. The metaphor would be an artist selling only to his friends, and not putting every piece for sale for everyone.
abduhl 6y ago
Spoofing distorts the market by making it appear that there is much more liquidity and demand or supply. Distorted markets are, theoretically, bad for various reasons. Commodities markets are underpinned by the idea of real price discovery happening: supply meeting demand at an agreeable price. Fake supply or demand undercuts this goal. Algorithmic traders just happen to be the ones taken advantage of here because they move fastest. If there were no algorithmic traders and everything was done manually the distortion in the market would still exist. An imperfect analogy: imagine you go out to the gas station to buy gas and see that there is a line of cars at the gas station charging $2.00/gal but there is no line of cars at the gas station charging $2.01/gal. You go to the $2.01/gal gas station, because you see that there's huge demand and you need gas now. As you drive back, you pass all of the $2.00/gal cars and realize they are all empty. You've been cheated by spoofing. Whether this is paternalistic or not is up for debate.
- uzakov 6y ago
  >Spoofing distorts the market by making it appear that there is much more liquidity and demand or supply. Distorted markets are, theoretically, bad for various reasons. Commodities markets are underpinned by the idea of real price discovery happening: supply meeting demand at an agreeable price. Fake supply or demand undercuts this goal. Does this logic apply to non-financial field? If someone (person X) creates a fake demand for a SaaS service Y and company Z builds service Y, should X pay money because Z decided to build Y, without a written contract between X and Z?
  - yellowstuff 6y ago
    I don't think that line of thinking will get you very far. You can pick up the ball and run with it in American football but not soccer. You can insider trade in US commodity markets but not US equity markets. Spoofing is illegal in US equity markets because that was the result of the rule-making process. I'd argue that banning spoofing is a good rule for equity markets, but it's not necessarily a good rule in other contexts.
    - uzakov 6y ago
      That is exactly my point, see parent comment - "Spoofing distorts the market by making it appear that there is much more liquidity and demand or supply. Distorted markets are, theoretically, bad for various reasons." banning spoofing in different markets/fields isn't necessarily a good thing.
  - bleepblorp 6y ago
    This will vary between jurisdictions but my understanding is that, yes, you can be sued for making a false promise to buy from a specific seller even if you don't get to the stage of a formal contract. Putting out a press release, or RFP, saying 'we want to buy X quantity of Y' without the intent to follow up isn't illegal. However, getting to the point of a handshake agreement with a specific vendor but then backing out means that you will be expected to pay compensation even though no formal contract was signed.
hogFeast 6y ago
You are correct. This was semi-frequent before 2008 but the spoofers were often individuals, and the exchange operators usually tolerated them because they did so much volume (Paul Rotter being the most famous). After 2008, the big algo traders got involved and spoofing was a huge issue because algos are often based on market depth. And the law was changed overnight (and the heavy-handed way that the federal govt came down on individuals, often at the request of algo traders, is unusual). Just generally: "spoofing" was always seen as unethical but it rarely mattered before 2008 because humans learned fairly quickly that when someone piled in orders around the price, it wasn't necessarily real. Equally, what we have also seen is that certain order types that were being used to conceal intention from algos (concealing your intention is a fundamental part of how markets operate) were also being lumped in with "spoofing". On JPM specifically, everyone knew they were spoofing for decades before this. I am not aware of an IB that did spoofing like JPM, and the reason why is that they did a ton of volume in these markets and used spoofing to control the price.
raziel2701 6y ago
It's illegal because the exchanges are the victims. If this was being done to retail traders there would be no crime. The message here is that it's illegal to mess with the algos but not illegal for algos to mess with your order.

mrfox321 6y ago

It's similar to questioning the morality of a scam artist who hires his friends to pretend to bid on something in front of the victim to influence them or drive up the price.

doublesCs 6y ago
Actually not a bad analogy, thank you.
the_jeremy 6y ago
It's worth pointing out that this holds true for the inverse scenario: dark pools (trading between large firms off-exchange) are legal. The metaphor would be an artist selling only to his friends, and not putting every piece for sale for everyone.

abduhl 6y ago

Spoofing distorts the market by making it appear that there is much more liquidity and demand or supply. Distorted markets are, theoretically, bad for various reasons. Commodities markets are underpinned by the idea of real price discovery happening: supply meeting demand at an agreeable price. Fake supply or demand undercuts this goal. Algorithmic traders just happen to be the ones taken advantage of here because they move fastest. If there were no algorithmic traders and everything was done manually the distortion in the market would still exist. An imperfect analogy: imagine you go out to the gas station to buy gas and see that there is a line of cars at the gas station charging $2.00/gal but there is no line of cars at the gas station charging $2.01/gal. You go to the $2.01/gal gas station, because you see that there's huge demand and you need gas now. As you drive back, you pass all of the $2.00/gal cars and realize they are all empty. You've been cheated by spoofing. Whether this is paternalistic or not is up for debate.

uzakov 6y ago
>Spoofing distorts the market by making it appear that there is much more liquidity and demand or supply. Distorted markets are, theoretically, bad for various reasons. Commodities markets are underpinned by the idea of real price discovery happening: supply meeting demand at an agreeable price. Fake supply or demand undercuts this goal. Does this logic apply to non-financial field? If someone (person X) creates a fake demand for a SaaS service Y and company Z builds service Y, should X pay money because Z decided to build Y, without a written contract between X and Z?
- yellowstuff 6y ago
  I don't think that line of thinking will get you very far. You can pick up the ball and run with it in American football but not soccer. You can insider trade in US commodity markets but not US equity markets. Spoofing is illegal in US equity markets because that was the result of the rule-making process. I'd argue that banning spoofing is a good rule for equity markets, but it's not necessarily a good rule in other contexts.
  - uzakov 6y ago
    That is exactly my point, see parent comment - "Spoofing distorts the market by making it appear that there is much more liquidity and demand or supply. Distorted markets are, theoretically, bad for various reasons." banning spoofing in different markets/fields isn't necessarily a good thing.
- bleepblorp 6y ago
  This will vary between jurisdictions but my understanding is that, yes, you can be sued for making a false promise to buy from a specific seller even if you don't get to the stage of a formal contract. Putting out a press release, or RFP, saying 'we want to buy X quantity of Y' without the intent to follow up isn't illegal. However, getting to the point of a handshake agreement with a specific vendor but then backing out means that you will be expected to pay compensation even though no formal contract was signed.

hogFeast 6y ago

You are correct. This was semi-frequent before 2008 but the spoofers were often individuals, and the exchange operators usually tolerated them because they did so much volume (Paul Rotter being the most famous). After 2008, the big algo traders got involved and spoofing was a huge issue because algos are often based on market depth. And the law was changed overnight (and the heavy-handed way that the federal govt came down on individuals, often at the request of algo traders, is unusual). Just generally: "spoofing" was always seen as unethical but it rarely mattered before 2008 because humans learned fairly quickly that when someone piled in orders around the price, it wasn't necessarily real. Equally, what we have also seen is that certain order types that were being used to conceal intention from algos (concealing your intention is a fundamental part of how markets operate) were also being lumped in with "spoofing". On JPM specifically, everyone knew they were spoofing for decades before this. I am not aware of an IB that did spoofing like JPM, and the reason why is that they did a ton of volume in these markets and used spoofing to control the price.

raziel2701 6y ago

It's illegal because the exchanges are the victims. If this was being done to retail traders there would be no crime. The message here is that it's illegal to mess with the algos but not illegal for algos to mess with your order.