Order Spoofing, Price Impact, and Market Quality

Abstract

We study how order spoofing affects prices and market quality in options and futures by analyzing data from all participants in Taiwan. Aggressive limit sell (buy) order revisions from order spoofing lead to subsequent price increases (decreases). The execution of revised opposite-side limit orders at improved prices aligns with the mechanism of spoofing. The Dynamic Price Banding Mechanism limits spoofing and the price impact from spoofing. Order spoofing also negatively affects market quality. Heterogeneity tests reveal a more pronounced price impact during daily open and close intervals, periods with large order revisions, wide bidask spreads, and notably for out-of-the-money options.

Keywords: Price Impact, Price discovery, Order Revision, Spoofing, Market Quality