The strange case of the robber bitten for spoofing his own stock
While our regulators are happy to let big investment banks manipulate the market they won’t stand for it when attempted by smaller players
In the latest sign of an intensified clampdown on excessive speculation, the China Securities Regulatory Commission fined local investor Wu Junle 1 million yuan (US$151,185) for trading stocks between accounts with the same ownership and spoofing, or quickly cancelling orders that are placed to create false buying or selling sentiment.
Business, December 6
Securities regulators have a way of appropriating the everyday idiom of the English language to create new technical terms for securities offences.
It is not really surprising that they should have to do this as the offences themselves are new. I don’t recall much objection to what they call “spoofing” when I started my career in broking. I am only surprised at how quickly regulators in China have adopted the jargon.
What is so wrong about “spoofing”?
Here we have a player in the market who decides to work up wider interest in a stock of which he is usually a principal corporate founder, and trades it back and forth across different accounts he holds to generate an illusion of liquidity or of impending big news.
Oh, sorry, no, that’s wrong.
Spoofing is actually when he withdraws from the market as soon as someone else hits his bid or lifts his offer. It is hard sometimes to keep up with all the nuances of these made-up securities crimes. My apologies.
But if you put your number up as a buyer and someone hits your bid, you have to buy at least one board lot before pulling your number down again, or else you risk being reported to the exchange.
And if it is only one board lot and you do it twice or you have been known to do it before, then you risk the seller telling the rest of the market and everyone laughs at you.
The other players are never fooled for long. It’s an easy bluff to stage, but also a silly one as it’s a very easy bluff to call. It’s a penny trader’s trick and people who consistently do it undermine the market’s trust in them. That’s a very big price to pay for a one-off profit of a few pennies.
So let’s take the case of the player who trades between his own accounts and does not immediately pull his number down when someone else joins the game.
I used to think well of such people in my days as a broker. They were invariably directly connected to the stock they played, mostly as controlling shareholders, and what they did was offer liquidity to investors who wanted in or wanted out.
The underlying idea is that no one throws a newborn baby onto the street with the advice “Take care of yourself, kid”.
You nurture small children and you nurture small stocks that you bring to the market if you are a responsible corporate chieftain.
Every now and then, you put them in play just so that all the other players know you are still there and still mindful of your obligations. You do it by tossing that stock back and forth between your hands and letting others catch some of it in flight.
Now I know that there are also people who think they can move a share price up with this illusion of trading and then offload a big chunk of stock on the innocent public at the peak of their push.
The difficulty with this caper is that there are many more keen-eyed traders than there are innocent members of the public watching the market.
What we have here once again is the laughter factor. Oh what frabjous joy it is to watch the biter bit, the robber robbed. This is far from a sure-fire way to make money.
But while our regulators are happy to let big investment banks manipulate the market with what they call “greenshoe” allotments in big stock placements, they won’t stand for it when attempted by smaller players.
Then they make up new words for new crimes.