Spoofing

Reviewed by Apoorva | Updated on Aug 27, 2020

What is Spoofing?

Spoofing is an illegal strategy in equity exchanges. When you buy or sell a cryptocurrency, it has some hallmarks of trading official currencies, such as the Euro, U.S. Dollar, and Japanese Yen. Spoofy is an anonymous trader who is allegedly involved in manipulating cryptocurrency exchanges.

Most trading platforms come with a quotation and pricing structure where the price of a cryptocurrency is listed in comparison with another currency, such as the U.S. Dollar. This is called a currency pair.

Understanding Spoofing

Cryptocurrency platforms show the day’s high and low price quotes, market capitalization, and supply. Unlike trading with a non-digital currency, the market for cryptocurrencies is not too liquid. Such trades may not be executed quickly. This can create volatility and ripen the market for manipulating cryptocurrencies.

Individuals with a huge number of bitcoins, ethers, or other virtual currencies are referred to as “whales” as they can have an outsized impact on how cryptocurrencies are priced. Whales may only choose certain exchanges as they understand the underlying mechanics better than smaller investors. They are in a position to exploit weaknesses in how orders are processed.

How Spoofing Works?

In 2017, suspicious activity was identified where a trader or group of traders was manipulating prices on the Bitfinex trading platform. This unknown trader was called ‘spoofy’ because of his go-to strategy, spoofing.

Spoofing can be explained as a form of market manipulation where a trader makes one or more well-visible orders but has no intention of pursuing them. While the trader’s spoof order is still active or just after it is cancelled, a second order is placed on the opposite end.

Consider the example of an investor who places a large buy order only to cancel it. He, then, places a sell order on the platform. The buy order drives the price of the cryptocurrency up; upon cancelling it and placing the sell order, the trader takes advantage of the resulting higher price. The spoof-buy order allows the trader to execute the sell trade at a better price than if the spoof buy order had not been placed.