Spoofing or layering (market manipulaton practice)
The term spoofing (or layering) refers to the act of a market participant bidding or offering with the intent to cancel before execution.
23 April 2021
REMIT breach: Rock Trading World S.A. fined for manipulating the Spanish gas market, ACER Infoflash
Spoofers seek to profit by unlawfully injecting false information into the market to distort prices and to trick others into trading at manipulated prices.
Annex II to Commission Delegated Regulation (EU) 2016/522 of 17 December 2015 describes the following indicators of spoofing as manipulative behaviour: submitting multiple or large orders to trade often away from the touch on one side of the order book in order to execute a trade on the other side of the order book, once the trade has taken place, the orders with no intention to be executed shall be removed.
Analogous definition is used in Annex III to Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive.
The European Agency ACER has published on 22 March 2019 an extensive guidance relating to spoofing as a manipulation practice (Guidance Note 1/2019 on the application of Article 5 of REMIT on the prohibition of market manipulation, layering and spoofing in continuous wholesale energy markets, 1st Edition).
The ACER’s Guidance Note provides examples of indicators to identify the behaviour taking into account certain characteristics of the orders, in particular the size, price, duration, status, pattern and repetition (other indicators compare the suspected manipulative behaviour with the usual behaviour of the same market participant and the behaviour of other market participants while trading in the same or equivalent products).
The ACER concludes that two cumulative elements must be considered in order to determine whether a behaviour can be considered as layering or spoofing:
- the issuing of non-genuine orders on one side of the order book in order to
- enter into transactions on the other side of the order book.
According to the ACER, these behaviours are always manipulative because they:
- give or are likely to give false or misleading signals to the market as to the status of supply or demand in the order book; and/or
- secure or attempt to secure the price of a wholesale product at an artificial level (price positioning).
For layering and spoofing behaviours to be considered attempted market manipulation, it is not necessary that they give false or misleading signals or place the price at an artificial level.
The mere intention of a market participant to give these signals or position the price artificially is sufficient for the behaviour to amount to attempted market manipulation.
Interestingly, after analysing constituent elements of layering/spoofing as a market manipulation practice, the ACER also notes that isolated elements of the said behaviours may be part of a legitimate trading strategy, in particular:
- market participant, in principle, may be active simultaneously on the sell and buy side (this may happen under specific circumstances, “for example when a market participant providing market-making services wants to take advantage of the market price volatility or is managing different portfolios in a completely segregated way”);
- market participant may issue orders at varying price levels “reflecting different willingness to buy or sell at diverse prices”.
Recent example of sanctioning an order-based manipulative behaviour of the type layering/spoofing is a fine of one million euros imposed on BP Gas Marketing Limited (ACER Infoflash of 20 January 2020).
In its decision, published on 16 January 2020, the Dispute Settlement and Sanctions Committee (CoRDiS) of the French Energy Regulatory Commission (CRE) held that the company BP Gas Marketing Limited (BPGM) engaged in market manipulation on the French Southern virtual Gas Trading Point (PEG Sud) between 1st October 2013 and 1st March 2014.
CoRDiS found that BPGM engaged, over the course of 56 instances spread over 37 trading days, in market manipulation consisting in a combination of trading behaviours including:
- layering a minimum of three sell orders throughout the trading day while placing iceberg orders hiding important volumes on the buy side of the order book;
- back-and-forth transactions within a short period of time that do not seem to follow a rational economical background;
- large cancellation or price lag of its sell orders (placing orders at a price far from the bid/ask spread to avoid their execution).
According to CoRDiS, BPGM’s behaviour was likely to send false or misleading signals to the market as to the supply and demand, thus breaching Article 5 of REMIT which prohibits market manipulation (CoRDiS’ decision subject to an appeal under the French national law).
This decision follows a previous CoRDiS decision from October 2018 imposing a € 5 million fine on the company VITOL S.A. for engaging in a similar type of market manipulation on the PEG Sud.
Moreover, in September 2019, the Great Britain’s Gas and Electricity Markets Authority (Ofgem) also sanctioned a manipulative spoofing by the company Engie Global Markets for around € 2.3 million.
Another case of layering investigation is described in the ACER REMIT Quarterly Issue No. 25 /Q2 2021.
As a result of an investigation opened in November 2018, the Spanish NRA (CNMC) published a decision on 23 April 2021, in which it imposed a fine of EUR 60,000 on Rock Trading World S.A. (Rock Trading) for a breach of Article 5 of REMIT.
In the decision, CNMC held that, during four days in November 2018, Rock Trading engaged in market manipulation on the Spanish wholesale gas market (Mercado Ibérico del Gas - ‘MIBGAS’).
CNMC found that Rock Trading engaged in two different behaviours during this period: besides layering also marking the close (on marking the close see the separate remarks here).
As regards layering, according to the CNMC, Rock Trading issued multiple non-genuine sell orders at lower prices (i.e. on 3 November for the D+2 product, the weighted average price of Rock Trading’s sell orders was 1.08 EUR/MWh lower than the weighted average price of the rest of the sell orders issued by other market participants) than the average market prices involving very limited volumes.
The purpose of this low volume sell strategy was to reduce Rock Trading’s potential economic loss in case its sell orders were executed, in order to conclude large volume buy transactions at lower prices (i.e. on 6 November for intraday product, Rock Trading managed to buy at a price that was on average 0.17 EUR/MWh lower than that of the rest of the mark).
Rock Trading applied this behaviour during the continuous trading sessions of the gas within-day, day-ahead and day+2 products on MIBGAS between 3 and 7 November 2018.
The ratio of its bought/sold volume on MIBGAS on November 2018 was 11.27. For this period, the average volumes of Rock Trading’s sell orders were between 5 and 8 MWh/day, which was significantly lower than the average sell orders of other market participants in November 2018.
At the same time, the average volume corresponding to Rock Trading’s buy orders was between 100 MWh/day and 350 MWh/ day, which was in line with the average buy orders of other market participants in November 2018.
During the investigation, CNMC found that Rock Trading had concluded a bilateral OTC gas-selling contract, which explained Rock Trading’s net buying position in November 2018 on MIBGAS.
CNMC concluded that Rock Trading’s behaviour breached Article 5 of REMIT because the layering behaviour gave false or misleading signals to the market as to the price of the corresponding natural gas products (by establishing a downward price trend) and therefore fell under the category of market manipulation defined in Article 2(2)(a)(i) of REMIT.