What is spoofing?
-Spoofing is a form of market manipulation where a trader places fake buy or sell orders, never intending for them to get filled by the market. Spoofing is usually done using algorithms and bots in an attempt to manipulate the market and asset prices by creating a false sense of supply or demand.
-The main idea behind spoofing is trying to create a false impression of buy or sell pressure. For example, a spoofer may set a large number of fake buy orders to create a false sense of demand at a price level. Then, as the market gets close to the level, they pull the orders, and the price continues to the downside.
How markets typically respond to spoofing
- Spoofing can be efficient if the orders are placed at key areas of interest for buyers and sellers, such as significant support or resistance areas.
Let’s take Eth as an example. Let’s assume Eth has a strong resistance level at $1,500. In technical analysis, the term resistance means an area where price finds a ‘ceiling’. Naturally, this is where we may expect sellers to place their bids to sell their holdings. If the price gets rejected at a resistance level, it can fall steeply. However, if it breaks out of the resistance, then there is a higher probability of continuation to the upside.
-If the $1,500 level seems like strong resistance, bots are likely to place spoof orders slightly above it. When buyers see massive sell orders above such an important technical level, they may become less encouraged to aggressively buy into the level. This is how spoofing can be effective in manipulating the market.
- Spoofing can be effective between different markets that all are tied to the same underlying instrument. For example, large spoof orders in the derivatives market could affect the spot market of the same asset and vice versa.
When is spoofing less effective?
-Spoofing can become riskier when there is a higher probability of unexpected market movements.
-For instance, let’s assume a trader wants to spoof sell a resistance level. If there is a strong rally taking place and the Fear Of Missing Out (FOMO) among retail traders suddenly drives massive volatility, the spoof orders can quickly fill. This is obviously not ideal for the spoofer, as they didn’t intend to enter the position. Similarly, a short squeeze or a flash crash can fill even a large order in a matter of seconds.
-When a market trend is mainly driven by the spot market, spoofing becomes increasingly risky. For example, if an uptrend is driven by the spot market, indicating high interest for directly buying the underlying asset, spoofing may be less effective. However, this is largely dependent on the particular market environment and many other factors.
Why do traders Spoof?
-Like most things in trading, the ultimate goal of spoofing is to make profits. It could be used as a trading strategy in itself, or it could be used within an investing framework.
-For instance, if a trader has purchased security that he wants to sell quickly, the trader might carry out a brief spoofing to increase the price of the security and exit their position. With the help of fake demand, the trader can exit at a higher price.
The risk is, if a trader on the other side wants to call his bluff and hit his bid before he can pull it, he may be stuck with an even bigger purchase than he intended.
