In recent years, the U.S. Securities and Exchange Commission (SEC), Commodity Futures Trading Commission, and the Department of Justice have pursued an increasing number of cases involving a relatively new form of alleged market manipulation known as “spoofing.” See, e.g., U.S. v. Coscia, No. 14-cr-00551 (N.D. Ill.); In re Panther Energy Trading, CFTC Docket No. 13-26 (2013); CFTC v. Nav Sarao Futures, No. 15-cv-03398 (N.D. Ill.); In re Hold Brothers On-Line Investment Services, Exchange Act Release No. 67924 (SEC Sept. 25, 2012); SEC v. Lek Secs., No. 17-cv-1789 (S.D.N.Y.).

If securities or commodities trading were a poker game, spoofing would be loosely analogous to bluffing your opponent. Typically, spoofing occurs when a trader sends a large order (for example, a “bid” or “buy” order) into the market with an intent to cancel it before it can be executed, while at the same time placing a smaller order on the other side of the market (for example, an “offer” or “sell” order) that they hope will be executed. The “spoofer” uses the large buy order to encourage other market participants—who may assume the large order means prices are trending upwards—to transact with them by executing against their smaller sell order. Once the smaller order is executed, the spoofer will quickly cancel their large buy order since their goal was never to have it executed in the first place. Spoofers will often reverse and repeat this behavior over and over again, sometimes hundreds of times, each time earning a small profit.

In 2010, as part of the Dodd-Frank Act, Congress specifically prohibited spoofing in the futures markets under the Commodity Exchange Act (CEA).7 U.S.C. §6c(a)(5)(C). However, there is no such specific prohibition under the federal securities laws. As a result, the SEC has typically prosecuted spoofing under the general anti-fraud provisions of §10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC has also prosecuted spoofing claims under §9(a)(2) of the Exchange Act. While this statutory provision is outside of the scope of this article, it is worth noting that §9(a)(2) governs “transactions in any security.” 15 U.S.C. §78i(a)(2). Arguably, bids and offers are not “transactions” until they are executed.