Spoofing in Equilibrium

Department: Finance

Speaker: Basil Williams (Imperial College)

Room: TBD

Abstract
We present a model of dynamic trading with exogenous and strategic cancellation
of orders. We define spoofing as strategically placing and cancelling orders in order
to move prices and trade later in the opposite direction. We show that spoofing can
occur in equilibrium, slowing price discovery and raising spreads and volatility. A
novel prediction is that the prevalence of equilibrium spoofing is single-peaked in the
measure of informed traders, suggesting that spoofing should be more prevalent in
markets of intermediate liquidity. Regulation which inhibits order cancellation not
only discourages spoofing but also harms legitimate traders; we illustrate numerically
how this tradeoff varies with market conditions and affects optimal regulation.