I Spoof You Not – Market Surveillance Goes After False Intent

Actimize FMC Product Team, Financial Markets Compliance

​Several high-profile cases brought by U.S. authorities in the past year have created the appearance of an uptick, as well as a crackdown, on a type of trading only defined and outlawed in 2010 — spoofing. 

As everyone circulates in Chicago this week at the FIA Futures & Options Expo, a number of key issues​ are at the top of their agenda – and no doubt this topic fits nicely into their mission statement. In particular, spoofing has been an extremely hot topic in the futures market and was included in Dodd Frank and updated in the Commodity Exchange ACT (CEA). (The “Disruptive Trading Practices” category includes spoofing). As more cases of spoofing have come to light this year, it’s on the regulatory radar for 2016 in the examination priorities both from the SEC and CFTC.

The CFTC has outlawed spoofing which is “the appearance of false market depth” to benefit a trader’s own interests “while harming other market participants.” Spoofing isn’t some isolated incidence – and it has occurred on the Chicago Mercantile Exchange, the New York Mercantile Exchange, the Commodity Exchange and the Chicago Board Options Exchange. Spoofing helped spark the May 2010 flash crash, which temporarily wiped out almost $1 trillion from the value of U.S. equities.

Why are we seeing more of these spoofing cases crop up now? One reason is that Dodd Frank and​ better regulatory tools have been put in place. Examiners are more trading savvy then in the past, which has contributed a great deal to picking up spoofing.

The most recent cases of spoofing have been identified by the regulators and a clear message has been sent out to market participants— and that is that there is zero tolerance for disrupting the markets with bogus orders. I think that regulators will only get better and better at detecting these types of manipulative techniques – and making it clear that no crime will go unpunished. 

Among the other trends we have noticed is that electronic trading has expanded to other asset classes where spoofing is now also relevant and has become a new focus for regulators including the areas of Fixed Income and FX. We’ve had a number of customers come to us this year to expand coverage to implement spoofing protections, either for additional asset classes or due to to increased volumes, or to bring consistency across different regions where they may have been doing things differently. Finally, we have noticed increased interest to monitor this type of behavior by a first line of defense, front office, and in real-time.

Spoofing, and its cousin layering, are just one of many concerns that financial institutions have that need safeguards and monitoring –and it won’t go away without diligence, consistency, and effective surveillance technologies designed to work across a range of assets and departments.

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