Order Spoofing, Price Impact, and Market Quality

Abstract

This study examines potential spoofing tactics by analyzing comprehensive order and transaction data of index options and futures. We find that transaction prices go up (down) after revisions of aggressive limit buy (sell) orders. These improvements in transaction prices result from the synchronous execution of opposite-side limit orders at better prices, consistent with potential spoofing tactics. We rule out alternative explanations for our findings: the order submission equilibrium and the chasing scenario. We employ the Dynamic Price Banding Mechanism, imposed to limit spoofing, as a quasi-natural experiment. Our findings indicate that potential order spoofing adversely influences market quality. The potential spoofing tactics significantly affect price, especially during market openings and closings, trading intervals with larger order revisions or wider bid-ask spreads, and particularly in out-of-the-money options.

Keywords: Price Impact, Order Revision, Spoofing, market quality, derivative market