Streetwise Professor Argues that Spoofing is ''Self-Correcting''
Commentary by Bob Zwirb
In a Streetwise Professor blog post titled "Spoof Me Once, Shame on You: Spoof Me Twice, Shame on Me," University of Houston finance professor Craig Pirrong asserted that "the very nature of spoofing - which involves doing things that are intended to be detected - makes it vulnerable to detection and countermeasures." In contending that high-frequency trading ("HFT") firms are able to detect spoofers, Professor Pirrong stated that spoofing "is a pathogen that found a niche, but the hosts' immune systems are adapting, and it will become less dangerous in short order."
Accordingly, Professor Pirrong concluded that although enforcement officials have prioritized spoofing, "the system tends to be self-correcting, and this mitigates the need for enforcement."
Commentary
Problems associated with new, innovative forms of trading often work themselves out in a reasonable manner in the marketplace, notwithstanding consternation they cause for regulators and for the status quo. Recall that during the 1980s, the introduction of junk bonds, and later "program trading," was seen by many as being problematic for the financial markets. More recently, high frequency and algorithmic trading have raised similar concerns amid calls for regulators and enforcement authorities to take action.
Spoofing is a form of manipulation, or fraud. But the direct victims of this activity are other high frequency and algorithmic traders, who make their living trading by monitoring and reacting to what other HFTs are doing. The question implicitly posed by Professor Pirrong is whether we should get all worked up over one set of algorithms deceiving another set. In this environment, it would appear that there would be enough incentive, resources and technology in the trading community to combat it in a cost-effective manner, so that the cost of enforcements (particularly given the difficulty of really defining the crime of spoofing) may not be worthwhile compared to other areas of potential regulatory or enforcement attention.