In finance, spoofing is a form of market manipulation, illegal in the United States since 2010, in which a trader (the "spoofer") places unreasonably large fake buy or sell orders in an effort to trick the market into driving the price in one direction or the other. If it works, the spoofer then takes the other side of the trade, cancels the original order, and then profits as the market bounces back to its original equilibrium.
For example, lets say the bid price on one "widget" is $100 and the ask price is $105. A spoofer might initiate a limit order to short sell 100,000 widgets at a price of $104. The hope is that other market participants will see this massive order and think that people want to sell widgets, so they will lower their price to front-run an anticipated drop in the price of widgets. The spoofer then places a buy order for 100 widgets at a price of $101. If the spoof works, sure enough, the relatively small buy order fills at $101. The spoofer then immediately cancels the huge sell order. With the massive sell order now out of the order book, the bid and ask prices immediately rebound to their initial $100 and $105, respectively. The spoofer now places another fake order to buy 100,000 widgets at $101, as well as an order to sell the 10 newly-acquired widgets at $104. With the spoof moving in the opposite direction, someone out there sees the huge buy order and thinks the price of widgets is about to go up, and the spoofer is able to complete the spoof by selling his just-acquired 10 widgets for the bid price of $104, clearing a profit of a sweet, sweet $30.
So spoofing is basically an elaborate form of bluffing. The spoofer has to be very careful, and very fast, especially at canceling the fake buy and sell orders, because they are theoretically putting something like $20 million at risk to make a profit of just $30. If the market moves against them suddenly, before they can cancel the fake orders, they can lose a lot of money in the blink of an eye.
If this sounds pretty stupid, it's because it kind of is. Why would anyone do this, and more importantly, why the heck would anyone fall for it? Well it turns out, as stupid as this sounds, it actually works. Of course no actual person would fall for the same spoof going in two opposite directions within the course of a few minutes or a few seconds, but it turns out that in modern financial markets, the vast majority of trading is high-frequency automated trading conducted by computers, based on algorithms and carried out on a time scale of miliseconds. And it turns out that a lot of these algorithms take the size of outstanding limit orders into account when trying to front-run tiny changes in price. Thus, the modern spoofer is essentially outsmarting relatively dumb computer algorithms.
In the United States, spoofing was made illegal in the 2010 Dodd-Frank Act, and is now treated as a form of wire fraud. However, despite its illegality, the ethics of spoofing are somewhat interesting, because its intended victim is not a person, and also because it's not always easy to say where the line between legal trading and illegal spoofing should be drawn. After all, the spoofer is not actually trading on secret information or withholding any crucial information from counterparties, and under most circumstances, it is perfectly legal to place orders, even very large orders, and then later change your mind and cancel them. Indeed, the spoofer's supposed crime is transparently conducted right out in the open. It is only through an analysis of the exact sequence of orders, trades, and cancellations that the spoof becomes apparent.
Moreover, the spoofer's spoof doesn't really impact long-term investors at all - in fact, it only takes money away from high-frequency robo-traders. Insofar as many people consider high-frequency trading to be a menace that front-runs the market and steals money from honest investors, the spoofers may actually be heroes, and the high-frequency traders should only have themselves to blame for not writing smarter algorithms. Of course the US government clearly disagrees, and the illegalization of spoofing is a tacit argument/admission that high-frequency trading is a valuable and necessary part of market making in modern financial markets. It also turns out that large-scale spoofing, while highly lucrative for the spoofer, can have profoundly disruptive effects on markets. For example the so-called "Flash Crash" of May, 2010, in which US stock markets crashed around 10%, only to recover within a few minutes, has recently been blamed in part on the spoofing activity of a small-time spoofer trading on his home computer from his house in London.