Finance Professor Explains How To Reduce Spoofing (Other Than By Enforcement)

University of Houston Finance Professor Craig Pirrong said that one way to reduce spoofing is to reduce "tick sizes" (i.e., the minimum price increment set by exchanges).

In his latest blog post, Professor Pirrong stated that, rather than "throw people in jail" for spoofing, regulators should take away the incentive to engage in spoofing by reducing the tick size. According to Professor Pirrong, where the tick size exceeds the cost of executing a passive order, traders (especially those who rely upon high-frequency or algorithmic systems) will seek to capture some of the spread component by positioning themselves to obtain a better bid or offer.

Commentary / Bob Zwirb

When seen through the eyes of an economist, spoofing is often viewed in a more benign light than when it is seen through the eyes of a regulator or enforcement attorney.