Cross-Market Spoofing

Alexis Stenfors, Mehrdaad Doraghi, Cristina Soviany, Masayuki Susai and Kaveh Vakili
Additional contact information
Mehrdaad Doraghi: Features Analytics
Cristina Soviany: Features Analytics
Masayuki Susai: Shiga University
Kaveh Vakili: Features Analytics

No 2022-04, Working Papers in Economics & Finance from University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group

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.

Keywords: foreign exchange; limit order book; manipulation; market microstructure; spoofing; trading (search for similar items in EconPapers)
JEL-codes: D4 F31 G1 (search for similar items in EconPapers)
Pages: 39
Date: 2022-06-13
New Economics Papers: this item is included in nep-mst
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http://repec.port.ac.uk/EconFinance/PBSEconFin_2022_04.pdf Full text (application/pdf)

Related works:
Journal Article: Cross-market spoofing (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:pbs:ecofin:2022-04

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