We’re currently living through a cryptocurrency Bear Market (here are 5 ways to earn in it) – where spoofing occurs more often than ever. Things aren’t looking too good for the stock market either, all while the real estate market is starting to fall in the United States. It is normal for investors to be retained during such times and for people to save liquidity for even deeper price falls – while trading volumes stagnate or decrease. Buy and sell orders (or long and short for margin traders) will never stop and continue contributing to the total volume. But there can be attempts to manipulate the markets in various ways, one of them being the spoofing method.
What is Spoofing?
Spoofing is one of the most well-known ways of manipulating the market, illegal in many countries, such as The United States, Australia, and other European jurisdictions. It represents a method where some traders try to outdo other traders and manipulate market prices by falsifying buy or sell orders on various financial instruments such as cryptocurrencies, stocks, CFDs, and many others.
Asset prices are directly influenced by the market’s interest (coming from demand and supply), and these so-called spoofers attempt to fake an increased interest in a particular asset or market. When this happens using extremely large amounts of money, the market can suffer sudden and volatile movements – and orders are immediately canceled before being filled.
Why would anyone do that?
Spoofing is practiced because it can often bring even more profit to institutional-grade investors who already benefit from extremely modern methods, state-of-the-art equipment, and teams of consultants – more directly to those performing high-frequency trading.
They can create a fake impression in the market, a feeling that retail traders should buy or sell a particular asset at a specific price, acting on technical analysis that becomes influenced. If a huge number of people sell assets at a certain price level following market manipulation, they create even more liquidity for the spoofers that want to buy (or vice-versa). While this is how the market works, with much-needed market makers and participants, sending false signals to manipulate the prices and retail traders’ behavior is strictly prohibited and punishable by law.
How does Spoofing work?
Once with placed trading orders, the market feels the increased pressure and can move in a particular direction even before hitting the so-called limit orders. Unfortunately, the market feels the balance changes because everything is based on numbers, and it’s an open market. Following several negative events in the market, especially during the 2008 Financial Crisis in The United States, this Spoofing practice was defined in more detail as the illegal practice of bidding or selling with the intention of canceling the order before execution.
In addition, the activity has come under the scrutiny of regulatory authorities such as the Commodity Futures Trading Commission (CFTC) and the Chicago Board of Trade (CBOT). Worldwide, there are still many scandals and tabloids talking about all kinds of Spoofing cases that have occurred in the past.
Is the cryptocurrency market also at risk?
Otherwise known as the land of the free, the crypto space is also at risk for spoofers. Because it is unregulated, many people worry that no one is being accountable for hijacks, hacks, or other forms of stealing digital money.
Even if the crypto space has its own outlaws, like Do Kwon, the creator of LUNA, or the creators of BitConnect – it’s essential to keep the eyes wide open, especially for market rumors. Although it is not a place for institutional traders, high-frequency trading thrives in the cryptocurrency space. There are many whales who can affect the market without the intention of doing so, simply because their orders are too large. Instead of getting scared, staying logical and rational is essential, away from negative emotions.
How can we avoid Spoofing / Market Manipulation?
It’s a good precautionary idea to research the same thing twice and continue attracting people with a defined analytical sense in the market – people who can come to the same conclusion by themselves after their own research. It’s essential to watch and follow the biggest metrics from the crypto space – including the Fear and Greed Index, to keep an eye on news and analyses or watch whale accounts. At the same time, asset diversification is recommended: there can be several types of cryptocurrencies in our portfolio, some of them being less risky than others. Besides that, digital wallets are still considered to be extremely secure.
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Investment involves risk; any ideas or strategies discussed herein should, therefore, not be undertaken by any individual without prior consultation with a financial professional to assess whether the ideas or techniques discussed are suitable to you based on your personal economic and fiscal objectives, needs, and risk tolerance. IXFI disclaims any liability or loss incurred by anyone who acts on the information, ideas, or strategies discussed herein.
