Definition
Spoofing
Spoofing is an illegal manipulation in which a trader places large orders with no intention of executing them, to create a false impression of demand or supply, then cancels them after moving the price.
A spoofer might post a big visible buy order to lure others into buying, push the price up, sell their real position into the demand, then cancel the fake buy. This deceives the market about true interest and is banned under SEBI's prohibition of fraudulent and unfair trade practices.
Spoofing and the related practice of layering are detected through order-book surveillance that looks for large orders placed away from the touch and cancelled before execution. Penalties can be severe, and exchanges' OTR and pattern-based monitoring are key tools against such manipulation.
Related terms
- Order-to-Trade Ratio (OTR)The order-to-trade ratio measures the number of orders (including modifications and cancellations) a participant submits relative to the number of actual trades executed, used to police excessive messaging.
- Quote StuffingQuote stuffing is a manipulative practice of rapidly submitting and cancelling large numbers of orders to clog the order book or data feed and slow down or confuse other participants.
- LayeringLayering is a form of spoofing where a manipulator places multiple orders at several price levels on one side of the book to create false depth and pressure, intending to cancel them once the price moves.
- Order Book ImbalanceOrder book imbalance is the difference between resting buy and sell volume at or near the top of the book, used as a short-term signal of likely price direction.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.