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Cross-Market Spoofing

Author

Listed:
  • Alexis Stenfors

    (University of Portsmouth)

  • Mehrdaad Doraghi

    (Features Analytics)

  • Cristina Soviany

    (Features Analytics)

  • Masayuki Susai

    (Shiga University)

  • Kaveh Vakili

    (Features Analytics)

Abstract

Since 2013, regulatory investigations have revealed widespread manipulation and collusive practices among banks active in over-the-counter (OTC) markets. These discoveries have resulted in fines and settlements amounting to billions of US dollars, criminal proceedings and stricter regulation worldwide. However, recent legal cases and regulatory reports indicate that authorities have stepped up their efforts to crack down on so-called “cross-market spoofing”. The manipulative tactic involves a combination of a genuine order in one market and a spoof order in another, which is notoriously difficult to detect. In this paper, we use a high-frequency data set of limit order book snapshots from the foreign exchange (FX) spot market to develop and test a methodology to assess the feasibility, and hence potential prevalence, of cross-market spoofing. Our findings show that predictable reactions follow potential single-market spoofs that a market manipulator may exploit. However, we also find that predictability may be observed in closely related markets. In particular, we discover that EUR/JPY offers a reliable pathway for a manipulator to exploit via spoof orders at deeper levels in the EUR/USD or USD/JPY limit order books. Overall, our pilot study lends support to the increasing attention to cross-market manipulation by compliance officers and financial regulators.

Suggested Citation

  • Alexis Stenfors & Mehrdaad Doraghi & Cristina Soviany & Masayuki Susai & Kaveh Vakili, 2022. "Cross-Market Spoofing," Working Papers in Economics & Finance 2022-04, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.
    • Handle: RePEc:pbs:ecofin:2022-04
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    References listed on IDEAS

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    Cited by:

    1. Gabauer, David & Chatziantoniou, Ioannis & Stenfors, Alexis, 2023. "Model-free connectedness measures," Finance Research Letters, Elsevier, vol. 54(C).
    2. Stenfors, Alexis & Dilshani, Kaveesha & Guo, Andy & Mere, Peter, 2024. "Detecting the risk of cross-product manipulation in the EUREX fixed income futures market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 92(C).
    3. Alexis Stenfors & Kaveesha Dilshani & Andy Guo & Peter Mere, 2023. "A Model to Quantify the Risk of Cross-Product Manipulation: Evidence from the European Government Bond Futures Market," Working Papers in Economics & Finance 2023-06, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.

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    More about this item

    Keywords

    foreign exchange; limit order book; manipulation; market microstructure; spoofing; trading;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G1 - Financial Economics - - General Financial Markets

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