DEFINITION: Spoofing is a type of fraudulent manipulation of the algorithmic trading of futures, stocks, and other financial products. The manipulation consists in placing an order to buy or to sell with the intent to cancel the order before it can be filled.
The purpose of spoofing is to create the illusion that the demand for a product is greater or less than it really is. This illusion, then, will tip the market in the direction desired by the spoofer.
The spoofer can then profit from the movement of the market in the direction he desires by putting through an order he does intend to fulfill.
ETYMOLOGY: The word “spoof” was the name of a type of hoax invented in 1933 by the English music hall entertainer and comedian, Arthur Roberts.
The word seems to have been appropriated for financial use sometime around 2008.
USAGE: It took time for Security and Exchange Commission (SEC) investigators to become aware of spoofing and for rules to be put in place clarifying its illegal status.
For technical reasons, it has also proved difficult for prosecutors to succeed in bringing prosecutions for spoofing to successful conclusion.
However, in August of 2022, after a three-week trial, two traders working for J.P. Morgan were convicted of securities fraud for spoofing by a federally empaneled jury in Chicago, Illinois.
The pair were scheduled for sentencing in 2023.