I think a market where everyone spoofs with impunity is a hellhole. Yes it’s hard to define and police, but that’s probably better than the alternative.
Spoofing is as old as time, as are most forms of market manipulation. The algo shops are fortunate that the regulators are accommodating the drawbacks of their machinery. That doesn't mean all of the regulations make sense in the broader context of market activity.
"Act fast because these are selling like hotcakes!"
"I've got another guy who wants to buy the car for $5k but I'd sell it to you for $6k if you can bring cash today."
"It's a buyer's market right now, so we should probably be willing to negotiate on the price as we sell your home."
Spoofing has been going since the mid-90s with no impact to the global financial system. It was only made illegal when markets went full electronic, and large HFT firms started losing money to spoofers.
The real problem with market stability is nanosecond liquidity and HFT firms that will pull liquidity when things get dicey. Spoofing largely doesn't occur anymore, and you still see huge swings in prices because the liquidity isn't there anymore...investment banks have been regulated out the market, HFT firms flee at the first sign of trouble, there are relatively few speculators willing to buck the market anymore.
Surely, HFTs are the key player for spoofing? To play this game, you need to be able to pull your orders faster than people can execute on them. E.g. you see flow on one exchange, you pull on the other?
As I see it, the main problem with spoofing is that it distorts the market information. Any trader, human or machine, can look at the current order book and assume it is somewhat bona fide. Without that, exchanges are just a random draw (more than otherwise). Hence the appeal of dark pools (well, at one time) etc.
Well, not anymore because it is against the law...but I think it is acknowledged that it is still going on (it is very hard to prove because you have to prove what someone's intention was when they entered the order). But the speed at which they can trade is obviously an issue by itself.
Afaik though, human traders have been spoofing on Eurex since the late-90s (Paul Rotter most infamously). And no-one looked at the order book and assumes it is bona fide because humans understand human reasoning, the issue was HFTs who use that as an input to their pricing model. You have iceberg orders, they are basically reverse spoofing, and it is how most institutions execute large trades...they don't put a huge order in one go because it will get picked off by HFTs, they break up the order into lots of 100 shares or whatever, so no-one uses the order book now anyway because HFTs will pick you off if you do (again, that is why spoofing was made illegal, the only way HFTs can pick you off is if a regulator has banned false bid/offers).
And how is that different from spoofing? If I know I need 100k shares but I am bidding 100 lots at a time then I am hiding my intention just like a spoofer (and btw, doing this will get you fined in some OTC markets...if you tell your broker I need 10k shares and you take his offer, and you then say you need another 10k shares then you get reported...at least it is totally clear in that instance that the rules exist to stop brokers losing money). Again, the market is run by HFTs who are just trying to make the most money by doing the least amount of work, part of which is tilting the rules in their favour so no-one can hide their intention from their algos.
"Act fast because these are selling like hotcakes!"
"I've got another guy who wants to buy the car for $5k but I'd sell it to you for $6k if you can bring cash today."
"It's a buyer's market right now, so we should probably be willing to negotiate on the price as we sell your home."