It takes a ‘spoofer’ to keep the speed traders honest

By John Arnold financial markets, to “spoof” means to make a bid or offer for a security or commodity with the intent of cancelling the order before it is executed. It is designed to create a false sense of investor demand in the market, thereby changing the behavior of other traders and allowing the spoofer to profit from these changes. It is illegal under federal statute. In late 2014 and now this past week, federal prosecutors indicted traders for violating anti- spoofing laws. Both indictments include vivid portrayals of ostensibly deceptive practices that generated profits by “tricking” the market. Until I retired in 2012, I was one of the largest traders of commodity futures. I am intimately familiar with every major commodities trading strategy and witnessed firsthand the evolution of these strategies in the course of my career. I was never a spoofer, nor was anyone in my firm. But I don’t believe spoofing should be outlawed. Just the opposite: Given how markets now function, I believe spoofers are beneficial. As a threshold matter, it is important to address the confusion and negative perceptions surrounding high-frequency trading, which has been the subject of endless debate. High- frequency trading is simply … continue reading

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