The Effect of Liquidity on the Spoofability of Financial Markets

Gu, Anri, Wang, Yongzhao, Mascioli, Chris, Chakraborty, Mithun, Savani, Rahul, Turocy, Theodore L. ORCID: https://orcid.org/0000-0002-2265-844X and Wellman, Michael P. (2024) The Effect of Liquidity on the Spoofability of Financial Markets. In: ICAIF'24: The 5th ACM International Conference on AI in Finance. UNSPECIFIED.

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Abstract

We investigate the relationship between market liquidity and spoof- ing, 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 liq- uidity, each of which employ drastically different profit-making strategies. Finally, building on our quantitative findings, we iden- tify and expound upon the mechanisms through which liquidity mitigates market manipulation.

Item Type:	Book Section
Faculty \ School:	Faculty of Social Sciences > School of Economics
UEA Research Groups:	Faculty of Social Sciences > Research Groups > Environment, Resources and Conflict Faculty of Social Sciences > Research Groups > Economic Theory Faculty of Social Sciences > Research Groups > Behavioural Economics Faculty of Social Sciences > Research Centres > Centre for Competition Policy Faculty of Social Sciences > Research Centres > Centre for Behavioural and Experimental Social Sciences
Depositing User:	LivePure Connector
Date Deposited:	05 Nov 2024 17:30
Last Modified:	09 Dec 2024 01:12
URI:	https://ueaeprints.uea.ac.uk/id/eprint/97526
DOI:	10.1145/3677052.3698634

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