As exchanges have provided more transparency for their products, there has been increased interest in determining how order flow and the state of the order book impact order submissions and price discovery. Studies of order books have noted the presence of orders that are fleeting and might be classified as spoofing orders.;Spoofing is a microstructure based trading strategy which has recently been classified as prohibited under the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) ("Dodd-Frank Act"). Section 4c(a)(5) of the Commodity Exchange Act in section 747 of the Dodd-Frank Act specifically prohibits trading that "is, is of the character of, or commonly known as 'spoofing' (bidding or offering with the intent to cancel the bid or offer before execution).";For example, a trader who places a spoofing order on the buy side will create the illusion of excess demand over supply by placing a large limit order on the bid side. The intent of the spoof order is for the trader to actually sell contracts at a higher price than is currently available. If successful, other traders will perceive that there is real information in this large limit order and trade ahead of it, thereby raising the price. This allows the spoofer to cancel the limit order and place a market sell order at a price that is at least one tick higher than the price at the time the spoofing order was submitted.;To date, there are only two other studies that specifically study spoofing orders. This dissertation is the only study of spoofing orders that examines spoofing orders from an order book perspective rather than examining individual traders' order submission, cancellations, and trades. This dissertation utilizes limit order book data for European equity index futures to test for possible spoofing orders. Findings indicate that approximately 15% of large imbalances in DAX futures contracts result in a price change that could be indicative of a successful spoof order. On the other hand, only about 5% of large imbalances in DJ Euro STOXX 50 futures contracts end with a change in price that could indicate a successful spoofing order.
展开▼
