The Effect of Liquidity on the Spoofability of Financial Markets

Gu, Anri, Wang, Yongzhao, Mascioli, Chris, Chakraborty, Mithun, Savani, Rahul ORCID: 0000-0003-1262-7831, Turocy, Theodore L and Wellman, Michael P (2024) The Effect of Liquidity on the Spoofability of Financial Markets In: Proceedings of the 5th ACM International Conference on AI in Finance.

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Abstract

We investigate the relationship between market liquidity and spoofing, a manipulative practice involving the submission of deceptive orders aimed at misleading other traders. Utilizing an agent-based market simulator, we model markets with varying levels of liquidity, adjusting the spread and intervals of a market maker's orders to control liquidity. Within these simulated markets, we evaluate the effectiveness of two novel spoofing strategies against a benchmark approach. Our experiments show that in high-liquidity markets, spoofing is substantially less profitable and less detrimental to other traders compared to their low-liquidity counterparts. Additionally, we identify two distinct spoofing behavior regimes based on liquidity, each of which employ drastically different profit-making strategies. Finally, building on our quantitative findings, we identify and expound upon the mechanisms through which liquidity mitigates market manipulation.

Item Type:	Conference Item (Unspecified)
Uncontrolled Keywords:	Market Manipulation, Spoofing, Liquidity, Agent-Based Simulation
Divisions:	Faculty of Science & Engineering Faculty of Science & Engineering > School of Electrical Engineering, Electronics and Computer Science
Depositing User:	Symplectic Admin
Date Deposited:	21 Nov 2024 09:10
Last Modified:	23 May 2026 09:31
DOI:	10.1145/3677052.3698634
Related Websites:	Author Publisher
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3188796
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