Key TakeawaysIn electronic markets, professional market makers continuously update bid and ask quotes based on international gold prices, trading volumes, and inventory risk, making order submission, modification, and cancellation very frequent. Frequent order cancellation itself does not equal spoofing—the real difference lies in whether there is a genuine intention to trade at the time of order submission. For investors, understanding this distinction helps in correctly interpreting order book changes and understanding why exchanges both require market makers to continuously provide liquidity and must monitor behaviors that use false orders to mislead the market. Market makers are not rule-makers of the market, nor can they replace exchanges in determining spoofing behavior; their responsibility is to continuously provide genuine, executable two-way quotes under trading rules, and to manage their own algorithms and order behavior. This article uses the HKEX derivatives market as a backdrop to explain the boundary between normal market making quotes and spoofing behavior, and how professional market making institutions keep their quoting behavior genuine, explainable, and auditable through systematic compliance management.
In May 2026, the U.S. Commodity Futures Trading Commission announced a Treasury futures spoofing case. A New York trader was found to have repeatedly submitted orders on one side of the order book with the intent to genuinely trade, while simultaneously placing large orders on the other side that were planned to be canceled before execution, in order to create false buying and selling pressure and cause the genuine orders to be executed at more favorable prices. The regulator ultimately imposed a $200,000 civil monetary penalty and a one-month trading ban.
This case may lead investors to ask: since spoofing is often accompanied by a large number of orders and cancellations, could the frequent revision of quotes by market makers also constitute spoofing?
The answer cannot be judged solely by the number of cancellations. Taking the HKEX gold futures market in which Delta Horizon Capital（德合资本） participates as an example, as a designated market maker in HKEX gold futures, Delta Horizon Capital（德合资本） needs to continuously calculate and update bid and ask quotes based on international gold prices, related futures contracts, exchange rates, market volumes, and its own inventory risk. When the reference price changes, the existing quotes may have deviated from the current reasonable price, and the system must cancel old orders and submit new orders in a timely manner. Therefore, frequent cancellation itself is not an abnormal phenomenon, but an important part of electronic market making to maintain the validity of quotes.
The true boundary lies in whether there is a genuine intention to trade at the time of order submission. Once a normal market making quote is executed by an investor, Delta Horizon Capital（德合资本） needs to bear the corresponding position and manage the risk through inventory management, risk control, or hedging in related markets. The main purpose of a spoofing order is not to be executed, but to create false supply and demand signals using orders planned to be canceled, thereby influencing the judgment of other market participants. The latest enforcement cases show that regulators are not concerned about "whether orders are canceled", but why orders are submitted, whether the submitter is prepared to bear the consequences of execution, and whether the related order and cancellation behavior forms a sustained pattern of deception.
For professional liquidity providers like Delta Horizon Capital（德合资本）—like Alpha Academic, CITIC Securities, Virtu and other HKEX designated market makers—compliance management and quoting capability are not two separate tasks. These institutions not only need to continuously provide genuine, executable two-way quotes, but also need to preserve records such as orders, market data, pricing parameters, inventory, and risk status, so that frequent cancellations and modifications can be reasonably explained by reference price changes, trading conditions, or risk management needs. Market makers are not responsible for determining whether other market participants engage in spoofing, but they must manage their own algorithms and order behavior to avoid the quoting system creating false or misleading liquidity.
From the appearance of the order book seen by investors, both normal market making and spoofing may manifest as frequent order appearance, modification, and cancellation. However, the trading purpose, risk assumption method, and sustained behavior pattern behind the two are completely different. To understand this distinction, one first needs to know why market makers must constantly cancel old quotes and re-quote.
1. Why Do Market Makers Need to Constantly Cancel Orders and Re-quote?
Compared with ordinary orders aimed at a single purchase or sale, market making quotes are not a static "price list", but a dynamic quoting system that needs to be continuously updated with the market. Market makers need to constantly cancel old quotes and submit new quotes, mainly for the following reasons.
First, Changes in reference market prices. After changes in international gold prices, related futures contracts, exchange rates, or other reference markets, the original bid and ask quotes may have deviated from reasonable prices. Market makers need to cancel old quotes and recalculate new two-way prices based on the latest market data.
Second, Changes in inventory. After a market maker's quote is executed, the net position changes accordingly. When long inventory is too high, the system usually reduces the willingness to continue buying and increases the willingness to sell or hedge inventory; when short inventory is too high, the opposite adjustment may be taken. Therefore, inventory changes not only affect the quote on one side, but may also cause changes in the overall two-way quote midpoint, quote sizes, and spreads.
Third, Increased market volatility. When market conditions change rapidly, old orders are more likely to become stale quotes, so the market making system needs to cancel old orders more quickly, recalculate, and submit new quotes to adapt to higher uncertainty.
Fourth, Changes in executions and order book. After changes in market depth, buying/selling pressure, and trading pace, the original quote size or spread width may no longer be appropriate and need dynamic adjustment.
Therefore, cancellation is not an exception in market making, but part of dynamic quoting. What regulators focus on is not "whether orders are canceled", but whether the order had a genuine intention to trade at the time of submission. For investors, timely cancellation of old quotes that have deviated from the market and re-submission of two-way prices calculated based on the latest market conditions can reduce stale quotes lingering in the order book. The role of a market maker is not to keep prices unchanged, but to continuously update executable prices as the market changes, so that investors can still obtain relatively continuous two-way quotes with a certain executable size.
2. The Core Boundary Between Normal Market Making and Spoofing
Since both market makers and spoofing actors cancel orders, investors will naturally ask: what exactly is the difference? The CFTC case mentioned above has provided a key clue—one side is an order ready to be genuinely executed, and the other side is a deceptive order planned to be canceled before execution. This distinction can be further elaborated from three dimensions.
The first is Different order purposes. For normal market making quotes, the submitter should in principle be able to accept the order being executed under the corresponding price conditions—the purpose of placing the order is to provide the market with executable two-way prices. However, the main purpose of a spoofing order at the time of submission is not execution, but to be canceled before execution and to use the false supply and demand signals it creates to influence other participants.
Second is the different way of bearing the consequences of execution. Once a normal market making quote is executed, the market maker needs to take on the corresponding position and manage risk through inventory adjustment or hedging; the deceptive order in spoofing behavior is usually not intended to establish a genuine position in that direction, but to influence other orders and price behavior.
The third is Different behavior patterns. Cancellations in normal market making can usually be explained by market changes—such as changes in international gold prices, movements in related market prices, inventory deviations, or a decrease in the risk size the system is allowed to take. Abnormal orders may manifest as: repeatedly appearing large orders that almost never execute, being canceled each time they are about to be executed, followed by actual trading in the opposite direction, and the same pattern persistently recurring.
The case of British trader Navinder Singh Sarao also fits this pattern. Between 2010 and 2014, he used an automated program to repeatedly place large orders without intention to execute in the E-mini S&P 500 futures market, canceled them after influencing other participants, and profited through actual trades. He eventually pleaded guilty in the United States and was ordered to forfeit approximately $12.8 million. Hong Kong's Securities and Futures Ordinance has clear provisions on market misconduct such as false trading and price manipulation; licensed institutions also need to comply with the SFC's Code of Conduct and related internal control requirements. For investors, what needs to be distinguished is: this kind of false order placement aimed at deception is not the same behavior as market makers canceling old quotes and updating new quotes based on real market changes.
3. How Exchanges and Regulators Analyze Abnormal Order Patterns
The above three dimensions—order purpose, way of bearing execution consequences, and behavior pattern—provide an analytical framework for distinguishing between normal market making and spoofing. But investors will naturally ask: in actual markets, how do exchanges and regulators use these dimensions to identify abnormal behavior? The answer lies in the data trail left by electronic trading.
In exchange and institutional systems, order submission, modification, cancellation, and execution usually leave time-stamped records. Regulators can assess whether there may be signs of lacking genuine trading intention by combining order size, order duration, cancellation position, actual execution direction, and repetitive behavior patterns. In actual enforcement, judgment usually requires combining sustained, repetitive order behavior and other evidence, and cannot be based solely on the cancellation of a single order.
HKEX has a market surveillance mechanism that can identify and analyze potential abnormal trading patterns by combining order and execution data. From a general market surveillance logic, order submission, modification, cancellation, and execution records can together form an important data foundation for analyzing abnormal behavior. Whether market misconduct is involved still requires a comprehensive judgment combining the complete trading pattern, account relationships, market impact, and other evidence.
For investors, the public order book can only provide limited clues. Repeatedly appearing large orders, concentrated cancellations near execution, or obvious asymmetry between the two sides of the order book may be worth noting, but investors usually cannot obtain complete account and order data, so they cannot determine that a participant has engaged in spoofing based solely on the public order book. Formal judgment still requires exchanges and regulators to combine complete data with other evidence.
IV. How Professional Market Making Institutions Leave Auditable Trading Records
For professional institutions with liquidity provision responsibilities, the core of compliance operations is not just "not violating rules", but also being able to provide complete, reasonable, and auditable explanations for their own quoting and cancellation behaviors when needed.
According to electronic trading and record-keeping requirements, institutions need to retain corresponding order and transaction records. For professional market making institutions, to further explain quoting behavior, they may also internally preserve records of the reference market data, pricing parameters, inventory status, risk limits, and risk control trigger information corresponding to the orders. The role of these data is not only to meet regulatory requirements—more importantly, when there are order and cancellation characteristics that significantly deviate from normal strategic behavior, or a large number of orders are repeatedly submitted and canceled within a very short period, the institution can backtrack and judge: whether this cancellation came from normal market changes, or from system parameter errors or strategy anomalies.
Professional market making systems also need to establish internal monitoring mechanisms: review abnormal strategy parameters or trading accounts, monitor order and cancellation patterns that cannot be reasonably explained by reference price changes, inventory management, or normal risk control, and review inconsistencies between order behavior and actual executions. Institutions can set up corresponding monitoring, alerting, or limiting mechanisms in the order generation and submission process according to their own business, exchange rules, and risk status, to reduce the risk of abnormal order and cancellation behavior entering the market.
For professional liquidity providers, stable quoting and compliant operations are not two independent tasks. The internal monitoring of market making institutions is mainly used to review their own accounts, strategies, and order behavior; the formal investigation and determination of whether other market participants constitute spoofing falls under the responsibilities of exchanges, regulators, and related enforcement procedures. Only genuine, executable quotes and complete, reviewable order records can together form market liquidity that investors can trust.
Conclusion: How Compliant Market Making Forms Trustworthy Liquidity
The role of a market maker in the market is not just to post bid and ask prices, but also to timely update quotes after changes in market conditions, executions, and inventory, continuously providing investors with genuine, executable trading opportunities. Exchanges and regulators are responsible for making rules, monitoring the market, and investigating abnormal behavior; market making institutions need to manage their own algorithms and orders so that frequent quote updates can be reasonably explained by reference price changes, trading conditions, and risk management needs. The ability to continuously provide genuine, continuous, and executable two-way quotes within a transparent and auditable framework is itself an important part of professional market making capability.
For investors, understanding the difference between normal market making quotes and spoofing behavior helps to correctly interpret large orders and cancellations in the order book, avoiding the misjudgment of normal market making activities as market misconduct. Futures and derivatives carry leverage risk; the discussion of regulatory and compliance mechanisms does not constitute a guarantee of future market performance or investor profits and losses.
References:
[1] U.S. Commodity Futures Trading Commission, "CFTC Orders New York Trader to Pay $200,000 for Spoofing", May 6, 2026.
https://www.cftc.gov/PressRoom/PressReleases/9227-26
[2] U.S. Department of Justice, "Futures Trader Sentenced to Time Served for Spoofing and Manipulation Charges", January 2020.
https://www.justice.gov/opa/pr/futures-trader-sentenced-time-served-spoofing-and-manipulation-charges
[3] Hong Kong Securities and Futures Commission, relevant materials on market misconduct under the Securities and Futures Ordinance.
https://www.sfc.hk/en/Rules-and-standards/Codes-and-guidelines/Codes-and-guidelines
[4] Hong Kong Securities and Futures Commission, Code of Conduct and relevant provisions on electronic trading.
https://www.sfc.hk/en/Rules-and-standards/Codes-and-guidelines/Codes-and-guidelines
[5] Hong Kong Exchanges and Clearing Limited, Market Surveillance and Rule Enforcement.
https://www.hkex.com.hk/Services/Rules-and-Forms-and-Fees/HKEX-Rule-Enforcement-and-Disciplinary/HKEX-Rule-Enforcement?sc_lang=en
Disclaimer: This document is provided by Delta Horizon Capital（德合资本） for institutional investor reference only and does not constitute any express or implied investment advice, offer, or solicitation. The data and information contained in this report are sourced from public market channels. Delta Horizon Capital（德合资本） makes no warranty as to its accuracy or completeness. Past performance is not indicative of future results. Market risk exists, and investment should be made with caution.