Spoofing Is a Silly Name for Serious Market Rigging: QuickTake

It’s a new crime but it isn’t new. It has a silly name but it’s no joke. Spoofing, a way to manipulate financial markets for illegitimate profit, is blamed for undermining the integrity of trading and contributing to the scariest crash since the financial crisis. Spoofers trick other investors into buying or selling by entering their own buy or sell orders with no intention of filling them. That creates fake demand that pushes prices up or down. Long considered disreputable but rarely dangerous, spoofing has emerged in an era of computerized trading as a threat to market legitimacy. Regulators, lawmakers and market authorities are struggling to define and control it.

In September 2020, JPMorgan Chase & Co. admitted wrongdoing and agreed to pay more than $920 million to resolve U.S. authorities’ claims of market manipulation in the bank’s trading of metals futures and Treasury securities over an eight-year period, the largest sanction ever tied to the illegal practice known as spoofing. Criminal charges had been filed in 2019 against several of the bank’s employees, including former head of the precious metals desk, Michael Nowak. In that case, the Justice Department used racketeering laws more commonly used in mafia and drug gang prosecutions, alleging the precious metals desk effectively became a criminal enterprise for eight years. In August, Bank of Nova Scotia agreed to pay $127.4 million to settle U.S. allegations that the company engaged in spoofing of gold and silver futures contracts, and made false statements to the government. In 2017, Citigroup was fined $25 million for manipulating the U.S. Treasury futures market. In 2016, a British futures trader, Navinder Sarao, pleaded guilty to spoofing charges in U.S. federal court in Chicago after losing an extradition battle; in January 2020 he was sentenced to a year of home detention after providing what the judge called “extraordinary cooperation” to prosecutors. Sarao had been arrested in suburban London after U.S. authorities said his activities had contributed to the flash crash of May 2010, when almost $1 trillion was temporarily wiped out in the U.S. stock market.