Spoofing is an illegal trading technique which under the Dodd-Frank Act carries a maximum penalty of 10 years in prison. In the days of trading Pits, what is now currently called spoofing was for a long time referred to as intimidating the market. Traders who offered contracts, or bid for them, in an attempt to move a market in a particular direction still had the risk of purchasing or selling those contracts that they may have “maliciously bid or offered”. Since the trader took that risk, it was considered a reasonable trading technique. Since the Bid or Offer was good for significantly longer than a fraction of a second, there was probably a lot more risk to the trader than the current spoofing techniques.
Algorithmic trading has created an environment of constantly shifting bids and offers for stocks, options and futures contracts and their options contracts as well. The civil case brought by the Commodities Futures Trading Commission which subsequently ended in a three year sentence, seems quite harsh. The 2013 Complaint by the CFTC against Panther Energy Trading L.L.C and Michael Coscia is shown here. Today’s electronic trading environment has numerous firms that participate as “liquidity providers”. These companies make constant markets and typically get rebates on fees from the Exchanges.
It is a common occurrence for a non-algorithmic trader to enter an order on an electronic platform and have an algorithm bid higher in order to induce the customer to pay a higher price for the contract that she was planning on purchasing. The difficulty is imagining how the CFTC chose to make an example of Michael Coscia and his Panther Trading when from my experience trading, and those of colleagues of mine, the problem permeates the trading industry. In markets where algorithmic trading companies pay little or no fees and have the speed of their algorithms competing against small traders spoofing is prevalent.
I applaud the CFTC for going after the problem of spoofing. I have serious reservations about whether enforcement against one individual is a fair and reasonable approach. If five firms would have been brought up on charges simultaneously, that would have sent a strong and fair message. For those of you who don’t understand the intricacies of spoofing or futures and options trading in general, our website provides excellent resources for traders.
The Order Ticket below shows a market that is wide enough that in all likelihood an algorithm would jump ahead of you if you were to bid or offer just above or below the current bid or offer. The next time you put in an order in an options contract with a wide market you can likely experience the phenomenon. Therefore, it is essential to understand what an options contract is really worth before trading it. Our Webinar Preview PDF might be helpful with that. If you have any questions: Contact US.
Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results.