John D Arnold, Columnist

Spoofers Keep Markets Honest

Spoofers are the ideal way to keep high-frequency traders from skewing the financial markets in their favor.

January 23, 2015 at 2:00 PM UTC

John Arnold is co-chairman of the Laura and John Arnold Foundation. He was the founder and, until 2012, chief executive officer of hedge fund Centaurus Energy. Previously, he held various positions at Enron, including head of natural gas derivatives.

It's a jungle out there.
Photographer: Simon Dawson/Bloomberg

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In financial markets, to “spoof” means to make a bid or offer for a security or commodity with the intent of cancelling the order before it is executed. It is designed to create a false sense of investor demand in the market, thereby changing the behavior of other traders and allowing the spoofer to profit from these changes. It is illegal under federal statute. In late 2014 and now this past week, federal prosecutors indicted traders for violating anti-spoofing laws. Both indictments include vivid portrayals of ostensibly deceptive practices that generated profits by “tricking” the market.

Until I retired in 2012, I was one of the largest traders of commodity futures. I am intimately familiar with every major commodities trading strategy and witnessed firsthand the evolution of these strategies in the course of my career. I was never a spoofer, nor was anyone in my firm. But I don't believe spoofing should be outlawed. Just the opposite: Given how markets now function, I believe that spoofers are beneficial.