Microstructure-Based Manipulation: Strategic Behavior and Performance of Spoofing Traders

53 Pages Posted: 19 Jan 2009 Last revised: 3 Aug 2014

See all articles by Eun Jung Lee

Eun Jung Lee

Hanyang University

Kyong Shik Eom

CRMR, University of California, Department of Economics

Kyung Suh Park

Korea University - Department of Finance

Date Written: January 15, 2009

Abstract

We examine how investors strategically spoof the stock market by placing orders with little chance of being executed, but which mislead other traders into thinking there is an imbalance in the order book. Using the complete intraday order and trade data of the Korea Exchange (KRX) in a custom data set identifying individual accounts, we find that investors strategically placed spoofing orders which, given the KRX's order-disclosure rule at the time, created the impression of a substantial order book imbalance, with the intent to manipulate subsequent prices. This manipulation, which made use of specific features of the market microstructure, is different from previously studied forms of manipulation, based on information or transactions. Roughly half of the spoofing orders were placed in conjunction with day trading. Stocks targeted for manipulation had higher return volatility, lower market capitalization, lower price level, and lower managerial transparency. We also find that spoofing traders achieved substantial extra profits. The frequency of spoofing orders decreased drastically after the KRX altered its order-disclosure rule.

Keywords: Spoofing order, Microstructure-based manipulation, Pre-trade transparency, Strategic trading behavior, Day trading

JEL Classification: G14

Suggested Citation

Lee, Eun Jung and Eom, Kyong Shik and Park, Kyung Suh, Microstructure-Based Manipulation: Strategic Behavior and Performance of Spoofing Traders (January 15, 2009). Journal of Financial Markets 16, 2013, 227-252 . Available at SSRN: https://ssrn.com/abstract=1328899 or http://dx.doi.org/10.2139/ssrn.1328899

Eun Jung Lee (Contact Author)

Hanyang University ( email )

505 KyoungSang Kwan, 55 Hanyangdaehak-ro,
Sangrok, Ansan, Kyeonggi-do
15588
82-31-400-5645 (Phone)

Kyong Shik Eom

CRMR, University of California, Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

Kyung Suh Park

Korea University - Department of Finance ( email )

Seoul, 136-701
United States

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