At 10:54 PM UTC on April 14, an enormous bitcoin sell order for 2,500 bitcoin was placed on the Binance order book. This deal was worth an estimated $212 million, with a purchase price of $85,600. The order was removed almost immediately, leading to speculation that the removal order may have attempted to unlawfully manipulate the market through a practice called spoofing. This event has renewed calls for tougher regulations in the cryptocurrency market. It particularly highlights the need for improved surveillance to safeguard the interests of retail investors and ensure a level playing field in trading activities. Spoofing is a crime in traditional finance. It includes making massive orders without any plan to execute on them to cause phony price action and trick other traders.
The squeeze came during a period of extremely low liquidity in the bitcoin market. This occurred at a time when the U.S. equity market was completely closed. This left the market much more vulnerable to manipulation. The sudden appearance and disappearance of such a large order can trigger a ripple effect, causing volatility as other traders and algorithms react to the perceived shift in market sentiment.
This article takes a deeper look into what happened and how spoofing works. It explores its history in the crypto market and the continuing debate on prevention measures.
What is Spoofing?
Spoofing is a manipulative trading tactic where a trader places a large order, typically a limit order, with no intention of actually executing it. The intent here is to deceive traders regarding the real supply or demand. In this way, you are gamifying them to respond to the faux market pressure you have generated. When the price has shifted according to the spoofer’s wishes, he cancels the order.
This activity is intended to deceive other market participants and to fraudulently create an artificial advantage for the spoofer. Spoofing can have the desired effect, such as a large order on one exchange spurring traders or algorithms on another exchange to remove their order, creating a void in liquidity and subsequent volatility.
Spoofing is when a trader posts a big limit order to incite trading volume in the other direction. Just as soon as the price gets close to actually filling that order, they withdraw it.
A History of Spoofing in Crypto
Spoofing, or the practice of placing false buy and sell orders, is not a new issue in the crypto market. In 2017 and 2018, it wasn’t uncommon for traders to place nine-figure orders. They didn’t plan on fulfilling these orders and would usually pull them within a couple of hours. In the wake of the 2017 ICO boom, smart contract platform trading volumes dramatically increased. At the same time, institutional skepticism was through the roof.
Even crypto luminaries like Vitalik Buterin, founder of Ethereum, have offered their take on the matter. BitMEX founder Arthur Hayes wrote in a 2017 blog post that he “thought it was amazing” that spoofing was illegal.
In 2020, rogue trader Avi Eisenberg gamed the decentralized exchange Mango Markets. He was ultimately convicted of spoofing in September 2022. This incident starkly illustrates that even in decentralized and supposedly permissionless environments, careful actors can be surprisingly easy to manipulate.
The Need for Stricter Regulations
The recent lapse in security on Binance has served to further fuel cries for more stringent regulations and surveillance technologies to be implemented across the cryptocurrency landscape. Spoofing is well-established to be illegal and heavily regulated in traditional finance. The crypto market operates in a legal gray area, complicating prosecutions of the people who participate in it.
"These tactics give sophisticated actors a consistent edge over retail traders. And unlike TradFi, where spoofing is explicitly illegal and monitored, crypto exists in a gray zone," - Dr. Jan Philipp
MEXC recently claimed to be the first exchange to successfully prevent a wave of market manipulation tactics, such as spoofing. An internal agency investigation found futures market manipulation attempts suspect increased by 60% from Q4 of fiscal 2024 to Q1 of FY 2023. This highlights the establishment’s increasing expectation that exchanges should take affirmative steps to prevent market manipulation.
Crypto exchanges must improve their surveillance capabilities and intelligence. They must require the use of circuit breakers and improve and enforce listing requirements to effectively deter spoofing.
Binance's Response
In response to the sudden move, Binance emphasized its ongoing commitment to providing a level playing field.
"Maintaining a fair and orderly trading environment is our top priority and we invest in internal and external surveillance tools that continuously monitor trading in real-time, flagging inconsistencies or patterns that deviate from normal market behavior," - Binance spokesperson
Now, industry experts are sounding the alarm. They are right when they say that we need to do more to protect retail investors from malignant tactics, such as spoofing.
"Retail users won't stick around if they keep getting front-run, spoofed and dumped on. If crypto wants to outgrow its casino phase, we need infrastructure that rewards fair participation, not insider games," - Dr. Jan Philipp
Dr. Jan Philipp, one of the lead authors of the study, recommends that regulators raise the bar and define spoiling as imitation.
Consequences of Inaction
The impact of ignoring spoofing and other varieties of market manipulation are no small matter.
"Spoofing needs to be taken seriously as a threat as it helped trigger the 2010 Flash Crash in traditional markets, which erased almost $1 trillion in market value," - Dr. Jan Philipp
If crypto wants to outgrow its casino phase, infrastructure that rewards fair participation, not insider games like spoofing, is needed, according to Dr. Jan Philipp.
Spoofing is rampant on most crypto exchanges, especially on altcoins with low liquidity.
