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Is Spoofing alive and well?
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Is Spoofing alive and well?

  #1 (permalink)
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Is Spoofing alive and well?

For the past 2-3 days (including MLK day) I seem to have noticed a change in the patterns I see on CL.

I am specifically referring to Depth of Market, but I suppose it is not like those patterns are not seen on a chart as well.

In particular, I seem to observe much more frequently what to the general 'trader' population would look like aggressive spoofing. Almost as if a new liquidity provider was added to the mix, or an existing one changed tactics, or some hedge fund perhaps.

Attached video is an example of the behavior seen.

I'd like to open the question to anyone who is able to answer, but I'd also like to direct the question to @artemiso whom, given the specific exposure to these themes, may be able to offer his/her take on this.

Is spoofing alive and well?

Attached Files
vlc-record-2017-01-18-15h20m40s-spoof.mp4-.mp4 (719.7 KB, 95 views)

Last edited by xplorer; January 18th, 2017 at 11:19 AM.
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  #2 (permalink)
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  #3 (permalink)
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Spoofing or fake liquidity is a factor in the markets. From my experience, it is most used during low volume periods when institutions want to get long when the runup is too fast such as in overnight markets. For example, they will post a big size on the sell side, scare the market, and then buy it up. This is most prevalent during the start of strong trends.
During the day, most institutions will hide their full liquidity.

Something they will do or used to do in the ES is recycle the order flow at market tops (and sometimes bottoms). They do this by constantly running stops while supporting the market within a certain trading range. My sense though is that focusing on individual order flow events is not as productive as trying to understand the overall context.

It is possible to determine if liquidity was spoofed simply by tracking the orders that trade at a level compared to the depth that was at the level. If less orders are required to trade through that level then most likely it was spoofed. Although, there are certain cases when this might not be true such as when traders go to market and pull their resting orders. Some high frequency traders may also have strategies that are based on their position in the book. They may not be spoofing to fool other traders but they pull their orders when the resting depth below them drops below a certain level.

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tpredictor View Post
Spoofing or fake liquidity is a factor in the markets. From my experience, it is most used during low volume periods when institutions want to get long when the runup is too fast such as in overnight markets. For example, they will post a big size on the sell side, scare the market, and then buy it up. This is most prevalent during the start of strong trends.
During the day, most institutions will hide their full liquidity.

Thanks for the post. The thing is, we both seem to know that spoofing does take place in most markets, and it's not just an occasional occurrence.

Why is it then that the CFTC ignores it? Sure, it made a poor lone trader such as Nav Sarao pay because he was spoofing all over, but this doesn't seem to have stopped everyone else doing it, does it?


Quoting 
Something they will do or used to do in the ES is recycle the order flow at market tops (and sometimes bottoms). They do this by constantly running stops while supporting the market within a certain trading range.

Yes, I figured as much


Quoting 
My sense though is that focusing on individual order flow events is not as productive as trying to understand the overall context.

I don't disagree. But I am curious by nature and so I asked.


Quoting 
It is possible to determine if liquidity was spoofed simply by tracking the orders that trade at a level compared to the depth that was at the level. If less orders are required to trade through that level then most likely it was spoofed. Although, there are certain cases when this might not be true such as when traders go to market and pull their resting orders. Some high frequency traders may also have strategies that are based on their position in the book. They may not be spoofing to fool other traders but they pull their orders when the resting depth below them drops below a certain level.

Well, my definition of spoofing assumes a basic level of understanding of order flow reading ability. So when I say 'spoofing' I am assuming we talk about a situation where a larger than usual resting set of orders is, say, 2-3 ticks above where price is being traded, and immediately decreases when price goes closer, and at the same time immediately increases back to the original level when price retraces back.

So price doesn't even have the chance of hitting that level - unless someone wants to 'punish' the spoofer and sends a burst of orders that will catch them out. Seen it happen.

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  #5 (permalink)
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Quoting 
Why is it then that the CFTC ignores it? Sure, it made a poor lone trader such as Nav Sarao pay because he was spoofing all over, but this doesn't seem to have stopped everyone else doing it, does it?

There have been several prop traders fined for such activity. However, if an otherwise reputable institution engages in it or if a firm is achieving a certain number of fills then they may not be able to prove it and/or may deem it not a problem.


Quoting 
Well, my definition of spoofing assumes a basic level of understanding of order flow reading ability. So when I say 'spoofing' I am assuming we talk about a situation where a larger than usual resting set of orders is, say, 2-3 ticks above where price is being traded, and immediately decreases when price goes closer, and at the same time immediately increases back to the original level when price retraces back.

These could also be automated programs that are seeking to envelope the price. I've seen this behavior too, and suspect it is some form of liquidity provider. This is a different type of spoofer. These traders are more actively involved in spoofing but they are probably also filling a lot of orders. Why would they put the orders there? Maybe because they figure if there is a blip in the market that the price will mean revert but if they using some sort of value algo then the longer the price stays "close" to their order then that will change the calculation of their "moving average".

In some cases, these are eager traders too who may be running algos that wait for a certain amount of time for their order to fill. If it doesn't get filled and price is only a few ticks away, they may just go to market. Sometimes the orders are stuck traders who are trying to get out when the market trends against them. Other aggressive traders, think of as the the "hammer" sometimes will step up and also offer in the same area. This is usually in trending markets where the liquidity provider will turn taker at resistance.

Another possibility is I suggested, some liquidity/hft traders may put in orders but only execute them when they are best in queue. If a trader pulls order underneath them then it will mess up their algos and they may be "forced" to pull too.

Maybe someone has better ideas how these work and will add more.

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xplorer View Post
In particular, I seem to observe much more frequently what to the general 'trader' population would look like aggressive spoofing. Almost as if a new liquidity provider was added to the mix, or an existing one changed tactics, or some hedge fund perhaps.

I actually don't see a clear case of spoofing activity in the video you posted. This looks like a simplistic market making model to me. I don't know the exact time you're posting and can look into this further on my side if you want, but I'm guessing there's about 40+ size behind 1 order on each side away from BBO. That's not really enough size to put a blip if you're spoofing, and usually you'd see asymmetric size in the classic spoofing strategy.

There's many reasons that they could seem like they are 'enveloping' the midprice outside BBO and I can't speculate all of them. I can mention a few anecdotal examples where I had rolled out something similar before though. The first being that you're trying to roll out a new strategy and want to visualize what it's doing in live trading, maybe you don't have the tools to back out your order from the book easily and you just want enough (unique) size on it that you can see it or distinguish immediately for quick feedback. You would also back away from BBO to minimize the risk of fill in this case. Other cases are that your vol estimate is high or you have a correlated position and so you don't actually want to be filled, and there's still value in leaving your order there for queue position later on.


xplorer View Post
Is spoofing alive and well?

Yes, but CME in particular has been increasingly aggressive in going after them.

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  #7 (permalink)
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tpredictor View Post
Spoofing or fake liquidity is a factor in the markets. From my experience, it is most used during low volume periods when institutions want to get long when the runup is too fast such as in overnight markets. For example, they will post a big size on the sell side, scare the market, and then buy it up. This is most prevalent during the start of strong trends.
During the day, most institutions will hide their full liquidity.

Something they will do or used to do in the ES is recycle the order flow at market tops (and sometimes bottoms). They do this by constantly running stops while supporting the market within a certain trading range. My sense though is that focusing on individual order flow events is not as productive as trying to understand the overall context.

It is possible to determine if liquidity was spoofed simply by tracking the orders that trade at a level compared to the depth that was at the level. If less orders are required to trade through that level then most likely it was spoofed. Although, there are certain cases when this might not be true such as when traders go to market and pull their resting orders. Some high frequency traders may also have strategies that are based on their position in the book. They may not be spoofing to fool other traders but they pull their orders when the resting depth below them drops below a certain level.


Precisely this happened in the overnight session on ZB two days ago. Traded in a range the entire Asian session, then it got up to the top before London open, but just outside of the range there was an order to sell 1000. Sure enough right at 12 pacific time 700 orders come off the sell and hit the market. That trend continued for almost an entire point over night....

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  #8 (permalink)
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artemiso View Post
I actually don't see a clear case of spoofing activity in the video you posted. This looks like a simplistic market making model to me. I don't know the exact time you're posting and can look into this further on my side if you want, but I'm guessing there's about 40+ size behind 1 order on each side away from BBO. That's not really enough size to put a blip if you're spoofing, and usually you'd see asymmetric size in the classic spoofing strategy.

Thank you. I'd like to take you up on the checking if you don't mind. Unfortunately I don't have the exact time recorded anymore but it was yesterday at around 10 EST. Possibly 10:09 EST. Don't worry if it's too vague - next time I'll include the clock as well.

I do understand the point you're making about spoofing usually predominant on one side (i.e. being asymmetrical), and I have seen that yesterday, but often it was those two sizes coming and going from the book.


Quoting 
There's many reasons that they could seem like they are 'enveloping' the midprice outside BBO and I can't speculate all of them. I can mention a few anecdotal examples where I had rolled out something similar before though. The first being that you're trying to roll out a new strategy and want to visualize what it's doing in live trading, maybe you don't have the tools to back out your order from the book easily and you just want enough (unique) size on it that you can see it or distinguish immediately for quick feedback. You would also back away from BBO to minimize the risk of fill in this case. Other cases are that your vol estimate is high or you have a correlated position and so you don't actually want to be filled, and there's still value in leaving your order there for queue position later on.

Understood, thanks. However, when talking about trying a new strategy and visualizing what it's doing live but you want to get a quick feedback / backing away to minimize fill risk, etc. : doesn't that fit within the classic definition of spoofing, i.e. the intention of not having your orders filled?

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  #9 (permalink)
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They might be trading try to spread combinations of futures contract. I'm not sure if the regulators look at spoofs off market the same as at the market because you can't execute against those trades, and that might be how they get away with it. But, it just makes sense that if you're spoofing to impact the trade you're more likely to do it during a low volume time or else your spoofs would be ignored so to speak.

Sometimes I've felt the heavy constant spoofers are probably the largest liquidity providers. So, that might be another reason that they get away with it because they are providing liquidity on both sides of the market as opposed to just trying to execute "toxic flow".

It's a good question though. All anyone can do is speculate unless they are the ones doing it. Sometimes the HFT's will execute in front of orderbook imbalances. It can make it much harder for discretionary traders to hit their targets. That's another sort of activity though.

You could always try to call up Goldman or the exchange and ask them. Are you the guy who just flashed the big fake size ? Inquiring minds want to know.

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What I believe is the Auto-Spreader trying to get fills around various calendar contracts and other instruments.

Thus it becomes I want to get it @-0.80 I don't care if I get it via the spreadbook or both outrights. Whichever fills first it cancels the other off. OCOed

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