Spoofing is a common practice on crypto trading platforms, where retail traders (that’s you and me) are being tricked by large institutions. In short, the institutions manipulate the market. So what is spoofing exactly, and how do you prevent it from happening?
What Exactly Is Spoofing in Crypto?
Spoofing is a form of market manipulation, usually carried out by large financial institutions.
In a nutshell, it’s when someone places a large order that they don’t execute. Put simply, it’s a fake order.
That doesn’t sound that bad, does it?
But it is.
Hear us out.
Let’s say someone places a large order for BTC or ETH just above the current market price. You and other retail traders see this order in the order book and think that when the market reaches that price and the order is triggered, the price will go up even more.
Because you think the price will go up, you buy up some BTC or ETH.
Then the market reaches the price where the order was to get executed, but nothing happens.
Or wait, something does happen: the price goes down.
Why?
Because instead of buying up BTC or ETH, the institutions sold off a large amount of it, making the price drop.
You see, once you and other retail traders pushed the price up, it became the perfect time to sell.
And once the institution has sold off some of the asset, they can, if they want to, buy it right back up again, because now the price is lower. If the market is generally stable, they count on the price bouncing right back again. But sometimes, they simply wish to sell.
Note that if someone places several large orders, they never execute around a certain price point; instead, they do one massive one. It’s called layering. It’s a more sophisticated form of spoofing.
Why Are Big Financial Institutions Allowed to Manipulate the Market?
Good question.
Right now, all the big crypto exchanges are using an execution model called the CLOB, or Central Limit Order Book. This is the same system used by NYSE, NASDAQ, etc. Let’s look a bit closer at the CLOB and why it’s working for NYSE and NASDAQ but not for crypto.
What Does the CLOB Do?
The CLOB matches buy and sell orders based on the order they were received in and the best price. For that reason, it’s a fair system.
In addition, as a trader, you can look inside the order book to see where all the orders are placed. Very transparent and, you’d think, only adding to the fairness. And for the NYSE, where it’s big financial institutions competing against one another, the CLOB is a fair system. Large institutions all have similar trading equipment, access to large amounts of funds, and teams of traders trading for them.
Lastly, large traditional (TradFi) exchanges are regulated. There are strict rules and financial authorities that oversee them.
Why Isn’t the CLOB Working for Crypto?
First off, the crypto landscape isn’t regulated the same way traditional finance is. If you tried spoofing repeatedly on NASDAQ, you’d get caught and jailed. Crypto exchanges, on the other hand, turn a blind eye as to these kinds of practices as they want the big financial institutions to keep trading with them.
Secondly, on crypto exchanges, large financial institutions trade against retail traders. They have trading equipment that allows them to execute orders much faster than you could ever dream of. For example, large institutions can execute trades as fast as 10 microseconds, whereas typical trade execution times for retail traders are around 100 milliseconds. The institutions are over 10,000 times faster! What’s more, most of it is computerized, allowing them to trade using sophisticated algorithms. In addition, they have much larger sums of money and have teams trading for them 24/7.
This leads to a lot of unfairness, such as the institutions always snapping up the orders at the best prices and the retail trader’s limit orders not getting executed or even excessive negative slippage!
Ouinex’s No-CLOB Execution Model
We developed a unique no-CLOB execution model for Ouinex.
How is the no-CLOB model different from the CLOB model?
For starters, we separated institutional traders from retail traders. The institutional traders can only “make” prices, meaning they don’t compete against you. Instead, they offer up buy and sell prices, and we (OuinexQ) send the best ones to the retail traders. Meaning the institutions are basically competing against one another to offer you the best price.
Moreover, as the institutions can’t “take” prices, there’s no reason for them to see the order book. So they don’t. They just get fed buy and sell orders at the current market price.
Retail traders, on the other hand, can still see the order book and will see other retail trader’s orders, as well as the best prices offered up from the institutions. They won’t be able to see any preset orders by institutions, on the other hand (such as a large buy order coming up at a certain price point).
What we’ve done is remove the unfair advantage institutions have on other platforms, as well as their ability to manipulate the market through tactics such as spoofing, layering, stop hunting, wash trading, front running, and so forth.
The Sum Up
Spoofing is a dirty tactic used by large institutions, particularly on crypto exchanges where there are fewer regulations than traditional exchanges. In a nutshell, it’s when large institutions place fake (i.e., orders that will be canceled before they are triggered) buy or sell orders in the order book to trick retail traders into thinking the market is going in one direction or another.
Institutions profit from this tactic by tricking retail traders into reacting to fake orders. When a large sell order appears below the current market price, retail traders assume the price will drop and start selling. That’s when institutions swoop in not to sell but to buy the asset at a discount. On the flip side, if the fake order is a buy order above the market price, retail traders rush to buy, expecting a price surge. The institutions then cancel their buy order and sell at a profit instead.