Spoofing Incentives, Cancellation Costs, and Market-Making Order Types

Summary

The document discusses the economics of spoofing and layering, focusing on whether high-frequency firms face a direct fee for canceling limit orders. The answer describes layering as displaying orders on one side of the book, sometimes paired with orders on the other side, to influence market prices. It notes that a fill can be acceptable when it occurs at the price the trader seeks, so execution risk depends on the strategy's price objective.

The answer says cancellations are generally not charged on several common venues and suggests equity exchanges may avoid such fees to encourage visible order books. It also mentions specialized order types that can protect displayed quotes unless specified trade conditions are met. These are broad claims rather than a survey of venue fee schedules, and fees and order protections can vary by market and participant. The document emphasizes that legal, financial, and ethical risks remain, and points to a discussion of the boundary between market making and layering without resolving that boundary.

Key ideas

• Layering uses displayed orders to influence prices and may involve orders on both sides of the market.
• A limit order fill can be acceptable when it meets the trader's price objective.
• The answer reports that cancellation fees are generally absent on several common venues, but does not survey all exchanges.
• Some equity venues offer order types that condition execution on specified trade circumstances.
• Spoofing and layering carry financial, legal, and ethical risks, and the boundary with market making can be difficult to assess.

Tags

# Economics of spoofing


# Economics of spoofing












I am trying to understand the economics of spoofing (I am a lay person).

I understand that from a risk point of view, aside from the legal risk, the main risk is that of having a limit order filled before one can cancel it.

My main question is: on US exchanges, do professional participants also have to pay for canceling a limit order? (is there a deterministic cost to consider as well?)

(I understand that some brokers impose charges for canceled order. But presumably, these fee schedules are more relevant for retail investors. I'am specifically wondering about non retail HFT type operations.)

## Answer by rrg (score 5, accepted)

https://quant.stackexchange.com/a/31620

Layering is a spoofing of buy(sell) orders sometimes complemented by higher(lower) sell(buy) orders that push the market up(down). Execution of a limit order above(below) would not be a concern, as your price objective is fulfilled.

No charge to cancel orders in the most common exchanges, for example, EUREX futures and OTC FI instruments. In equity HFT would also suggest no charge as would be detrimental to exchange objective of an increased order book.

This article by Bloomberg's Matt Levine details how market making and layering activities could be a thinly separated line, https://www.bloomberg.com/view/articles/2015-10-08/why-do-high-frequency-traders-cancel-so-many-orders-.

Additionally, there exist order types in equity HFT exchanges that protect the bid(offer) from being executed, unless trade conditions are met.

Try KCG's excellent Demystifying Order Types, https://www.kcg.com/uploads/documents/KCG_Demystifying-Order-Types_092414.pdf.

Financial risk, legal, moral all abound....

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.