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Most financial transactions occur securely, but occasionally, despite your best efforts, you may discover an unauthorized transaction. When an unauthorized transaction is reported, a bank typically gathers information, analyzes the incident, and makes a determination about what happened and what the next steps will be.

Learn more about the process here.

What Qualifies as an Unauthorized Transaction?

Unauthorized transactions are any bank account transactions that the account holder did not approve of. It could be a payment that was mistakenly charged to your account, but it could also indicate fraudulent activity. For instance, a criminal might write a fraudulent check from your checking account or use your debit card to make an unauthorized withdrawal from your bank account without your knowledge.

There are a number of different methods fraudsters may use to try to get access to your checking account, including:

•   Stealing and “washing” a check (meaning erasing the original information and adding fraudulent details)

•   Stealing your debit card (or finding and using a lost debit card)

•   Stealing your information with card skimmers and hidden cameras

•   Conducting a scam in which they try to convince you to share your confidential account info.

What Should You Do If You Find an Unauthorized Charge?

If you find an unauthorized charge, it’s important to take action as quickly as possible. Contact your bank or card issuer’s fraud department, and see what next steps are recommended (more details on this below).

Depending on the circumstances, you may want to freeze or lock your credit as well. You should additionally consider reporting the incident to the Federal Trade Commission, or FTC (ReportFraud.ftc.gov) and potentially the Internet Crime Complaint Center (IC3.gov).

Recommended: Can You Dispute a Zelle Transaction?

How to Report Fraudulent Charges to Your Bank

If you notice a transaction in your bank account that you did not authorize (perhaps a bank alert that you set up informed you), it’s crucial that you contact your bank’s fraud department immediately. The phone number is typically on the back of your debit card, or some banks may offer the option of messaging on their website or in app. A representative can walk you through next steps, such as:

•   Canceling or freezing your debit card

•   Ordering a new card

•   Updating your bank account password (and ideally your email password as well)

•   Starting a formal fraud investigation with the bank

In some cases, the bank’s representative may recommend opening a new bank account to further protect your finances.

Worth noting: If the bank’s fraud detection software notices a suspicious transaction, the bank will generally contact you via text, email, or phone call to verify the transaction. If you don’t recognize the transaction, the bank will begin its fraud investigation.

Recommended: How to Report Identity Theft

The Bank Fraud Investigation Process: A Step-by-Step Breakdown

Whether you as the consumer bring the unauthorized transaction to the bank’s attention or the bank’s fraud detection system finds the issue, the bank or credit union will typically investigate as follows:

Step 1: The Bank Places a Hold on Your Card and Issues a New One

Typically, when there is an unauthorized transaction reported, your bank will place a hold on your card so no further, potentially fraudulent transactions can occur. It will also typically issue a new card, which allows you to regain control of your financial transactions. If there was an issue such as an unauthorized debit directly from the account, the bank may advise putting a hold on the account and opening a new one.

Step 2: You May Receive Provisional Credit for the Disputed Amount

Generally, a bank will issue a temporary credit for the transaction in question as it investigates. If it determines that the transaction was indeed unauthorized, this will become a permanent credit.

Step 3: The Bank Gathers Evidence From You and the Merchant

As the investigation gets underway, the bank will take information from you and the merchant involved. These details may include the date, time, and amount of the transaction and whether it happened online or in person. They’ll also analyze other transaction patterns and consumer behavior. This additional information can help them establish what happened.

Step 4: A Final Decision Is Made and Communicated to You

Based on these details, the bank should be able to determine if the transaction was unauthorized or if there are fraudulent charges — and if the merchant has any blame in the scenario. The bank may or may not reimburse the customer, depending on their findings.

Further, the bank may pursue charges against any criminal involved, if applicable and possible. The bank will also file a suspicious activity report (SAR) if that is deemed appropriate and hand the case over to the authorities.

Recommended: What Can Someone Do With Your Bank Account and Routing Number?

What Are Your Rights Under Regulation E?

Regulation E is a federal rule that allows for implementation of the Electronic Fund Transfer Act (EFTA). It is designed to protect consumers in electronic transactions, like debit card purchases, ATM transactions, direct deposits, and P2P app transfers. (This is separate from the FDIC, which protects you in the very rare instances of a bank failure.)

Specifically, Regulation E establishes rules that guide error resolution, fraud, and liability. By doing so, Regulation E ensures that banks provide clear disclosures and follow fair processes for disputed transactions.

Here are some important details about timing under Regulation E:

•   When consumers report potential fraud, banks — whether a traditional or online bank — generally have 10 business days to investigate the transaction (20 business days if the account was opened in the last 30 days).

•   Once the bank has determined there was an error, it has only a single day afterward in which to correct it.

•   If the bank can’t complete its investigation within 10 or 20 business days, it must issue the consumer a credit to the account for the disputed amount, minus $50, while the investigation continues. Usually, the bank or credit union has up to 45 days to finish their investigation and share their findings.

•   In some cases (such as if the incident occurred in a foreign country), it may take up to 90 days to achieve a final resolution.

How Can You Proactively Prevent Unauthorized Transactions?

While no one can with absolute certainty prevent an unauthorized transaction from ever taking place, there are valuable steps you can take to lower your risk, whether you’re conducting and online . These include:

•   Using unique, complex passwords. Your email, financial accounts, and any other online accounts should have unique and complex passwords. These should be updated often and never reused or shared. You might want to consider using a password manager service to assist with this.

•   Turning on alerts. Bank alerts can be helpful in spotting fraud in real time. Turn on all relevant alerts available in your bank’s mobile app or on its website. You can also monitor your transactions in app or on the site and balance your checking account regularly to help you identify unauthorized charges.

•   Using all the security measures available to you. Multifactor authentication (MFA) and biometric screening (such as facial recognition) add extra layers of protection on top of passwords.

•   Not sharing your PIN. Think of a unique PIN for your debit card, and don’t share it with anyone.

•   Protecting your wallet. Always be smart about where you stash your wallet. Also consider using an RFID wallet. This can block contactless scanning of your cards’ chips, which hold your confidential banking details. Only carry the cards you need; keep the rest at home in a safe.

•   Being careful at ATMs and points of sale. Make sure no one is watching you punch in your PIN when making a transaction (they could steal your card and then use it). Always check ATMs and gas pumps for signs of card skimmers, or devices that fit over the slot where you dip your card and steal your credentials.

•   Recognizing phishing scams. Fraudsters are always finding new ways to get account information. Educate yourself about the latest bank and phishing scams, and always be wary when someone asks for your account information. Just because someone calls or texts saying they are “from your bank” doesn’t make it true.

The Takeaway

Just as it’s important to take basic security measures to prevent your financial information from getting into the wrong hands, it’s also crucial to act quickly if you detect an unauthorized charge on your debit card or a fraudulent transaction in your account. Banks must take reasonable steps to investigate unauthorized transactions and notify you of the results in a timely manner. In addition, many banks have state-of-the-art security features and alerts to help protect your finances.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How long does a bank have to investigate a fraud claim?

In most scenarios, banks have 10 business days to investigate a fraudulent transaction after you report it. If they can’t finish it in that timeframe, they may have to credit your account while they continue the investigation. In total, banks and credit unions have 45 business days to resolve an issue, except for some specific exceptions (like if the fraud occurred in another country).

What kind of evidence do banks look at during an investigation?

When investigating unauthorized transactions, banks typically take details about time, place, and amount from both the account holder and the merchant. They also look at consumer behavior and past transaction data as they work to establish what happened.

Can a bank deny an unauthorized transaction claim?

Yes, after an investigation, a bank can deny an unauthorized transaction claim. If they do so, they must provide a valid reason such as the account holder having reported the transaction too late, the transaction having actually been authorized, or the bank client having failed to take adequate measures to protect their account.

Will reporting a fraudulent charge affect my credit score?

Reporting a fraudulent transaction or charge should not negatively impact your credit score. It might, however, help protect your score by removing incorrect data from your credit history.

What happens if I accidentally reported a legitimate transaction as fraud?

If you accidentally report a legitimate transaction as fraud (say, you completely forgot about an online purchase), it’s important to contact your bank or card issuer immediately to cancel the report. A single instance like this shouldn’t lead to any further problems as long as you notify your financial institution as quickly as possible with the correct information.

How can AI improve fraud detection for banks?

AI can improve bank fraud detection with its power and speed. It can analyze huge amounts of data in real time to spot patterns and identify evolving fraud tactics. This can also minimize false alarms for consumers.

Photo credit: iStock/NoSystem images

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
^Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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This article is not intended to be legal advice. Please consult an attorney for advice.

SOBNK-Q425-039

Overdraft and non-sufficient funds (NSF) fees have a lot in common. Both fees are triggered when there’s not enough money in an account to cover a transaction, except with overdrafts, the transaction usually goes through, and with NSF, it’s canceled.

Both of these bank fees can be avoided with a bit of focus and practice. Read on to learn the details.

What Are Overdraft Fees and How Do They Work?

Here’s the meaning of an overdraft fee: When a bank account balance is negative (meaning transactions exceed deposits), the account holder is often charged an overdraft fee. The transaction goes through, but the account holder owes the bank the cost of the transaction to bring the account back to zero, as well as the overdraft fee set by the bank.

Typically, overdraft fees will continue with each transaction until an account’s balance is out of the red. That means if an account holder is unaware of the overdraft and goes on using the card without making a deposit, they could be hit with a fee for each charge, no matter how small.

Overdraft policies vary from bank to bank, but typically they kick in when a debit card or checking account transaction exceeds the amount held in a bank account.

When the transaction goes through, the bank has a few choices:

•   If the account holder has opted for a tool like overdraft protection, they may be shielded from overdraft fees up to a certain amount (bank policies vary as to how much).

•   If the account is typically in good standing, or if the account holder has never overdrafted before, the bank may choose to waive overdraft fees in this instance (or you might be able to request this and see if you can avoid overdraft fees).

•   If the account holder has a history of overdrafting, or their account is relatively new, the bank may choose to charge the overdraft fee.

When You Could Get Hit With an Overdraft Fee

It’s not just debit card purchases that can set off an overdraft fee. If the account holder doesn’t have enough cash in their checking account, any of the following transactions could lead to an overdraft fee:

•   ATM withdrawals

•   Checks

•   Autopay bill payments or withdrawals

•   Transfers between bank accounts

As mentioned above, once an account holder overdraws, the bank may continue to charge subsequent overdraft fees on the account until the account balance is restored through a deposit. It’s worth noting that not all banks will always assess a fee, however. If you are shopping for a new financial institution, you might look for a bank that doesn’t charge fees.

What Is the Average Cost of an Overdraft Fee?

The average overdraft fee is currently $26.77, but it can be as high as $35 or so, which can add up quickly when someone isn’t paying attention to their checking account balance. It’s worth noting that some consumer activists and lawmakers call for capping these fees at a lower figure, which would benefit consumers.

Recommended: Can a Cleared Check Be Reversed?

What Are Non-Sufficient Funds (NSF) Fees and How Do They Work?

On the surface, it’s hard to tell the difference between overdraft and NSF fees. Both fees occur when an account doesn’t have enough cash to cover a transaction.

However, here’s the meaning of an NSF fee: The account holder is charged when an account doesn’t have enough money to cover a transaction and the transaction is canceled or rejected.

An account holder might trigger what are known as NSF charges instead of an overdraft fee if they:

•   Opt out of or never signed up for overdraft protection

•   Already exceeded the bank or credit union’s overdraft protection limit

•   Write a check that’s more than the balance of the account

When You Could Get Hit With an NSF Fee

NSF fee policies vary by banking institution, but an account holder is more likely to be charged in the following situations:

•   Check writing. When someone writes a check for more than the account’s balance, the check bounces, and the transaction won’t go through. The account holder will be charged an NSF fee by their bank, and they may be charged an additional fee by the bank or entity that tried to cash the check.

•   ACH payments. An ACH payment, or Automated Clearing House Network payment, can be an easy way to transfer money or pay someone, but if the transferring bank doesn’t cover ACH payments, the transaction could be canceled and the NSF fee charged. Examples of ACH payments can include automated loan debits and mobile payment apps.

What Is the Average Cost of an NSF Fee?

The average NSF fee is currently $16.82, but some banks may charge considerably higher. It can be a wise move to familiarize yourself with your bank’s fee structure so you understand how much damage NSF fees could cause. You might also see if you can find a fee-free checking account.

Key Differences Between Overdraft and NSF Fees

NSF and overdraft fees are commonly lumped together as general bank fees, but they are not the same. Here’s the difference between overdraft and NSF fees:

5 Ways to Avoid Overdraft and NSF Fees for Good

Overdraft and NSF fees are frustrating for many people because they fall into the category of bank fees you should avoid — and you can easily do so with a few simple practices.

1. Setting Up Email and Text Alerts

Many banks and credit unions offer email and text bank alerts that account holders can set up to notify them of low balances. For example, an account holder could set up an alert when their checking account balance falls below a certain amount.

With enough notice, account holders have time to transfer money into the account to cover upcoming charges or auto-debits.

2. Utilizing Direct Deposit

Setting up direct deposit with an employer means paychecks go directly to a bank account on payday. It’s a nearly immediate payment, opposed to, say, waiting for a check by mail then depositing it at the bank. This could save someone from overdraft fees, especially if paychecks and major bills occur at regular intervals.

3. Linking to a Savings Account for Overdraft Protection

Linking your checking account to a high-yield savings account (or any savings account, for that matter) can be a good way to dodge overdraft and NSF fees. By connecting two accounts, you know that if you pay out more than is in your checking account, it won’t go into negative territory. Instead, funds will seamlessly be transferred from your savings account. Check the fine print with your bank to see if there are limits on how much can be covered in this way.

4. Checking Finances Regularly

While automation can help, nothing beats a regular check-in for managing your bank account. Consider reviewing account balances at least once a week. It can help you keep those numbers in mind when a large transaction or purchase comes up.

5. Utilizing a Budgeting App

Keeping a budget is an important part of financial wellness. Not only does it involve knowing the balance of bank accounts, but it can also prevent people from overspending or making unnecessary purchases that can send an account into overdraft. Some budgeting apps come with alerts to notify users when account balances are low. One good resource: Your financial institution. See what it offers.

Recommended: Is Overdraft Protection Worth It?

The Takeaway

Both overdraft and non-sufficient funds (NSF) fees occur when your bank balance drops below zero into negative territory. The key difference is that with overdraft fees, the transaction is typically completed, while with NSF fees, the transaction is usually rejected. You might look for a bank which doesn’t charge overdraft fees up to a limit to minimize the impact of these charges and take steps to always keep your account with a positive balance.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Can a bank charge you both an overdraft fee and an NSF fee for the same transaction?

No, typically you will either pay an overdraft fee (if the payment was completed) or an NSF fee (if the payment was denied) for a transaction. You should not be assessed both fees for a single bank transaction.

Do all banks charge overdraft and NSF fees?

No, not all banks charge overdraft and NSF fees. It can be a good move to do an online search to see which financial institutions have reduced or eliminated these fees when choosing your banking partner.

What should you do if you’ve been charged an overdraft or NSF fee unfairly?

If you feel you have been unfairly charged an overdraft or NSF fee, contact your bank’s customer service department and politely request that the fee be waived, asking to speak with a supervisor if needed. If that isn’t successful, you might reach out to the Consumer Financial Protection Bureau (CFPB) or the Office of the Comptroller of the Currency (OCC) for assistance.

How does overdraft protection work?

Overdraft protection typically works by linking your checking account to another source of funding, such as a savings account or line of credit. This backup source can automatically transfer funds to cover transactions when your checking account isn’t sufficient. In this way, you avoid having checks bounce or purchases declined. There can be a fee for overdraft protection; check with your bank.

Can an NSF fee hurt your credit score?

NSF fees are not reported to the credit bureaus, so they do not directly affect your credit score. However, if they lead to carrying a debt that gets turned over to a collections agency, that could have a significant negative impact on your credit score.

Photo credit: iStock/Ivan Pantic

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
^Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOBNK-Q425-032

In the financial space, the term “spoofing” refers to an illegal form of stock market and exchange trickery that is often used to change asset prices. Given that the stock markets are a wild place, and everyone is trying to gain an advantage, spoofing is one way in which some traders bend the rules to try and gain an advantage.

Spoofing is also something that traders and investors should be aware of. This tactic is sometimes used to change asset prices – whether stocks, bonds, or other types of assets.

What Is Spoofing?

Spoofing is when traders place market orders — either buying or selling securities — and then cancel them before the order is ever fulfilled. In a sense, it’s the practice of initiating fake orders, with no intention of ever seeing them executed.

Spoofing means that someone or something is effectively spamming the markets with orders, in an attempt to move security prices.

What’s the Point of Spoofing?

Because stock market prices are determined by supply and demand — for instance, the more demand there is for Stock A, the higher Stock A’s price is likely to go, and vice versa — they can be manipulated to gain an advantage. That’s where spoofing comes in.

By using bots or an algorithm to make a high number of trades and then cancel them before they go through, it’s possible for spoofers to manipulate security prices. For a trader looking to buy or sell a certain security, those valuations may be moved enough to increase the profitability of a trade.

Spamming the markets with orders creates the illusion that demand for a security is either up or down, which is then reflected in the security’s price. Because it would require an awful lot of “spoofed” orders to move valuations, spoofers might rely on an algorithm to place and cancel orders for them, rather than handle it manually. For that reason, spoofing is typically associated with high-frequency trading (HFT).

Is Spoofing Illegal?

If it sounds like spoofing is essentially cheating the system, that’s because it is. In the United States, spoofing is illegal, and is a criminal offense. Spoofing was made illegal as a part of the Dodd-Frank Act, which was signed into law in 2010. Specifically, spoofing is described as a “disruptive practice” in the legislation, straight from the U.S. Commodity Futures Trading Commission (CFTC), which is the independent agency responsible for overseeing and policing spoofing on the markets:

Dodd-Frank section 747 amends section 4c(a) of the CEA to make it unlawful for any person to engage in any trading, practice, or conduct on or subject to the rules of a registered entity that —

(A) violates bids or offers;

(B) demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or

(C) is, is of the character of, or is commonly known to the trade as ‘spoofing’ (bidding or offering with the intent to cancel the bid or offer before execution).

Additionally, there are laws and rules related to spoofing under rules from the Securities and Exchange Commission (SEC), and the Financial Industry Regulatory Authority (FINRA), too.

Example of Spoofing

A hypothetical spoofing scenario isn’t too difficult to dream up. For instance, let’s say Mike, a trader, has 100,000 shares of Firm Y stock, and he wants to sell it. Mike uses an algorithm to place hundreds of “buy” orders for Firm Y shares — an algorithm that will also cancel those orders before they’re executed, so that no money is actually spent.

The influx of orders is read by the market as an increase in demand for Firm Y stock, and the price starts to increase. Mike then sells his 100,000 shares at an inflated price — an artificially inflated price, since Mike effectively manipulated the market to increase his profits.

Consequences of Spoofing

Because spoofing is a relatively easy way to manipulate markets and potentially increase profits, it’s also a fairly common practice for some traders and firms, despite being against the law. That transgression can cost spoofers if and when they’re caught.

For example, one financial institution was fined nearly $1 billion by the SEC during the fall of 2020 after the company was caught conducting spoofing activity in the precious metals market.

But it’s not just the big players that can be on the receiving end of a smack down by the authorities. During August of 2020, an individual day trader was caught manipulating the markets through spoofing activity — actions that netted the trader roughly $140,000 in profits. The trader was ultimately ordered by the CFTC to pay a fine of more than $200,000.

Despite the cases that make headlines, it’s generally hard to identify and catch spoofers. With so many orders being placed and executed at once (especially with algorithmic or computer aid) it’s difficult to identify fake market orders in real time.

How to Protect Against Spoofing

There are a number of parties that are constantly and consistently trying to gain an edge in the markets, be it through spoofing or other means. For investors, it’s worth keeping that in mind while sticking to an investing strategy that works for you, rather than investing with your emotions or getting caught up in the news cycle.

In a time when a single social media post or errant comment on TV can send stock prices soaring or into the gutter, it’s critical for investors to understand what’s driving market activity.

The Takeaway

Spoofing is meant to gain advantage in the markets, but as such it’s illegal and penalties can be steep. Beyond the spoofers trying to manipulate the market, spoofing has the potential to affect all investors.

If spoofers are manipulating prices for their own gain, that can cause traders and investors to react, not realizing what is going on behind the scenes. While this is more of an issue for active investors or day traders, it’s something to be aware of.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

FAQ

What does spoofing mean in the stock market?

In the financial space, the term “spoofing” refers to an illegal form of stock market and exchange trickery that may be used to alter asset prices. Spoofing is one way in which some traders bend the rules to try and gain an advantage.

Is spoofing legal?

In the United States, spoofing is illegal, and is a criminal offense. Spoofing was made illegal as a part of the Dodd-Frank Act in 2010, and is policed by the Commodity Futures Trading Commission (CFTC).

How can you protect yourself from spoofing?

There’s no foolproof way to protect yourself and your portfolio from spoofing, so it may be best to stick to your investing strategy and try not to get caught up in market hype. Further, you can keep an eye out for unusual market movements, use limit orders, and even reporting suspicious activity to the SEC.

Photo credit: iStock/visualspace