Non-Genuine Orders, Real Risks: How Spoofing and Layering Impact Markets

Kraken’s Efforts to Promote a Safer Trading Environment

At Kraken, we place a strong emphasis on promoting fair and transparent markets. To support this, we’ve developed tools and processes aimed at identifying and addressing potential market abuse, including spoofing and layering. This includes real-time market surveillance. Our team, which receives regular training on market abuse risks, uses this information to help detect unusual or suspicious trading behavior. We also carry out ongoing risk assessments and update our policies and procedures to reflect evolving market manipulation trends. These measures are part of our broader approach to fostering a safe and well-informed trading environment.

Maintaining market integrity is a shared effort: traders also play a vital role. Choosing where and how you trade can make a big difference. That’s why it’s important to trade on reputable, regulated platforms like Kraken, where strong protections are in place to detect and prevent market manipulation. Certain manipulative practices, such as spoofing and layering, are illegal in the United States and many other jurisdictions due to their impact on market integrity, and can result in significant civil or criminal penalties. Staying informed and cautious is your best defense.

The Illusion Game: What Spoofing and Layering Really Mean

What is Spoofing?

Let’s say you’re watching the market and suddenly see a large buy or sell order come in. It looks like big players are ready to make a move – so you jump in, too. But just as quickly as those orders appeared, they vanish. That, in a nutshell, is spoofing. Spoofing is when a trader places large orders they never intend to execute – what’s known as “non-genuine” orders – just to give the illusion of strong demand or supply. 

What is Layering?

Layering is a more sophisticated version of spoofing. Instead of placing one big non-genuine order, a trader places multiple non-genuine orders at different price levels – creating the illusion of market depth. The idea is to nudge the market in a certain direction and then trade on the other side to profit from the shift. For example, if a trader wants to buy an asset at a lower price, they might place several sell orders above the current price to push it down, buy at the dip, then cancel those non-genuine sell orders.

From Illusion to Impact: How Spoofing and Layering Influence Market Prices

Why Do Traders Spoof?

At its core, spoofing is all about deception. The spoofer’s goal is to trick the market into seeing demand or supply that will only exist temporarily. By placing non-genuine orders, they try to manipulate other traders into making moves they wouldn’t have otherwise made. This creates artificial price movements that the spoofer can profit from. For example, they might place a huge buy order to make it look like prices are about to shoot up, encouraging others to buy. Then, just before the order is filled, they cancel it and sell into the rising price. It’s a strategy built to exploit emotion and herd behavior – when people follow the crowd, assuming others know something they don’t.

Why Do Traders Layer?

Layering works on a similar principle but takes a more sophisticated approach. Instead of one  non-genuine order, a trader places a series of smaller, non-genuine orders at different price levels, giving the appearance of real market interest and deeper liquidity. The goal is to make it seem like there’s strong buying or selling pressure building up. This can influence other traders to adjust their own orders, often unknowingly playing into the trader’s strategy. Once the price moves in the desired direction, the trader executes a genuine order – one they actually intend to carry out – on the opposite side of the market, then cancels the layered orders. While spoofing often aims to shock the market with a single move, layering tries to guide the market subtly in a certain direction.

Case Study: How Spoofing Sparked the 2010 Flash Crash

One of the most dramatic examples of spoofing in action was the infamous 2010 Flash Crash. On May 6, the U.S. stock market took a staggering dive – dropping nearly 1,000 points in just five minutes – only to recover most of the loss within the next 20 minutes. What triggered this extreme volatility? A London-based trader used spoofing tactics to manipulate the market. Using custom software, he placed massive sell orders on the E-mini S&P 500 futures – orders he never intended to execute. These orders created the illusion of overwhelming selling pressure, spooking high-frequency trading algorithms into action and causing a panic. The trader then canceled those fake orders and bought at the lower prices, profiting as the market overreacted. In total, he manipulated markets – actions that eventually led to charges of market manipulation and spoofing by the U.S. Department of Justice in 2015. His case was a wake-up call to regulators and traders alike: spoofing isn’t just unfair – it’s illegal, and it can shake entire markets in moments.