How Many Orders does a Spoofer Need? - Investigation by Agent-Based Model -

Abstract

Most financial markets prohibit unfair trades as they reduce efficiency and diminish the integrity of the market. Spoofers place orders they have no intention of trading in order to manipulate market prices and profit illegally. Most financial markets prohibit such spoofing orders; however, further clarification is still needed regarding how many orders a spoofer needs to place in order to manipulate market prices and profit. In this study I built an artificial market model (an agent-based model for financial markets) to show how unbalanced buy and sell orders affect the expected returns, and I implemented the spoofer agent in the model. I then investigated how many orders the spoofer needs to place in order to manipulate market prices and profit illegally. The results indicate that showing more spoofing orders than waiting orders in the order book enables the spoofer to earn illegally, amplifies price fluctuation, and reduces the efficiency of the market.