Considerations for Spoofing Detection – Proving Intent

By: Chris Waitz, Director of Regulatory Affairs, Eventus

In recent enforcement action, The CFTC charged one trader and fined two other traders and one proprietary trading firm for spoofing violations. The two traders and the firm received fines totaling $850,000 and the traders also received trading suspensions of four months and six months.

While these actions show the CFTC continues to aggressively pursue spoofing violations, the charges and orders also provide insights into what the CFTC believes is proof of intent to spoof. The following elements were detailed by the CFTC as evidence:

1. Spoof, or non-bonafide orders, were typically between 10 and 50 times larger than the genuine orders
2. Genuine orders were often placed as ‘Iceberg’ or hidden orders while spoof orders were fully displayed to the market
3. The spoof orders were canceled far more quickly than the genuine orders. In one of the cases the spoof orders were, on average, canceled after 11.8 seconds while the genuine orders, on the occasion they were canceled, were canceled after an average of 55.4 seconds
4. In the event the genuine orders were completely, rather than partially, filled, the spoof orders were canceled after just 2.3 seconds
5. Spoof orders were on average canceled more quickly when the market moved towards those orders, and canceled more slowly when the market moved away from those orders
6. In instances when multiple spoof orders (i.e. layering) were placed at varying price levels, the spoof orders closest to top of book were canceled before spoof orders deeper in the book
7. During the relevant period, the genuine orders were filled or partially filled 89% of the time, while spoof orders were filled or partially filled just 2% of the time
8. Incidents of spoofing were repeated hundreds of times

Of particular note is the length of time spoof orders were live in the market prior to being canceled. In the past, spoof orders were often only briefly live before being canceled. This made it relatively easier to detect spoofing as the time window to monitor was limited. A longer time period, 10-15 seconds or more, presents a challenge to compliance officers and surveillance teams as spoof orders could potentially stay on book as long as a typical genuine order. As a result genuine trading activity is more likely to trigger spoofing alerts resulting in potentially large numbers of false positives.

ViP: Validus’ trade surveillance and algo monitoring tools offer a suite of procedures designed to detect instances of potential order manipulation including spoofing and layering. These procedures can be configured to identify spoofing activity taking place over any period of time, such as 10-15 seconds. However, configuring a spoofing procedure for this type of “long spoofing” may generate a greater number of false positive candidate alerts. To handle these candidate alerts, Validus offers robotic process automation to efficiently process the candidates and assigns a probability score to present only the highest-risk alerts for human review. 

Available automations include indicators such as order book imbalance and market dominance, but they can also be customized for each client’s unique requirements.The factors listed above showing intent to spoof provide insight on automations that may be useful to identify the highest-risk spoofing alerts for surveillance analysts’ review. Additionally, Validus’ reporting suite allows users to generate trend analysis which can be used for pattern and practice review to identify repeated instances of potential spoofing by a single or group of traders or accounts.

About Eventus

Eventus is a leading global provider of multi-asset class trade surveillance and market risk solutions. Its powerful, award-winning Validus platform is easy to deploy, customize and operate across equities, options, futures, foreign exchange (FX), fixed income and digital asset markets. Validus is proven in the most complex, high-volume and real-time environments of tier-1 banks, broker-dealers, futures commission merchants (FCMs), proprietary trading groups, market centers, buy-side institutions, energy and commodity trading firms, and regulators. The company’s rapidly growing client base relies on Validus and Eventus’ responsive support and product development teams to overcome its most pressing regulatory challenges. For more, visit  www.eventus.com.