If your high frequency trading algorithm is so dumb that it can be tricked by an order that is then canceled, you deserve to lose money.
Anyone doing actual analysis of companies and trading accordingly would be completely unaffected by a spoofed order.
I think that there is an argument that spoofing should be legal, but we would need to de-anonymize the trades so that you could develop some digital analog for reputation. That way if I see an order from a known spoofer, I can discount it.
If shares were only traded based on what other people trade it for, isn't that the blind leading the blind, and the price it is traded for will have little grounding in reality.
I have several issues with HFT, however 'spoofing' as it is described sounds like it should be perfectly legal to me. If a player wants to trick the market, it is an irregularity that should be capitalised on by someone with a better understanding of the true value of the security
What does that even mean divorced from supply and demand? A share is worth precisely what someone will pay for it. You may think it will be worth more or less later, but right now that is what it is worth. That is the price discovery.
I think there is an argument for allowing spoofing, in that it is very hard to enforce.
But be clear, spoofing is bad for ALL market participants, not just HFT because it makes the supply/demand calculation more imprecise. This lack of precision leads to less fine grained pricing (in the form of a widened bid/ask spread) which hurts long term investors more than anyone.
It seems to me that a law that hinges on proving the intent of the trader seems destined for failure. It looks like this guy got caught by his incriminating emails and not based on his actual trading.
I like your idea of de-anonymized trades. Perhaps it could be something like the blockchain ledger.
This actually happens a lot in some venues, especially dark pools. This leads to pretty high bid/ask spreads and lowered liquidity.
> It seems to me that a law that hinges on proving the intent of the trader seems destined for failure.
Which is the primary argument for making it legal in my mind, because a law that is unenforced only penalizes honest market participants. Another option would be to dramatically increase the cost of the punishment.
Another big problem is that even the idea of "intent" is in question when it comes to algorithmic trading. Absent a code comment //spoofing goes here or an email it seems like you are getting into deep philosophical territory.
> I like your idea of de-anonymized trades.
To be fair, there are lots of problems with it. Big block traders would absolutely hate this as it would give market makers such an advantage. Tracking reputation would become yet another advantage of sophisticated market participants that would be largely unavailable (or expensive) to other participants. Further, nothing would prevent reputation gaming, and detecting it may be even harder than spoofing.
Basically anything that increases the bid/ask spread is likely to benefit market makers at the expense of the rest of the market and simplicity is a huge virtue.