Spoofing typically refers to the practice of entering orders into the market that are not considered bonafide. A bonafide order is one that is entered with the intent of trading. Spoofing orders are entered into the market with the intent of misleading other market participants, and these orders were never entered with the intent of being executed. The purpose of these orders is to make other participants believe that there are more real market participants who are willing to buy or sell than there actually are. By spoofing on the bid side, market participants are misled into thinking there is a lot of interest in buying. This usually leads to other market participants adding more orders to the bid side and moving or removing orders on the ask side with the expectation that prices will go up.

When prices go up, the spoofer then sells at a higher price than would've been possible without the spoofing orders. At this point, the spoofer initiates a short position and cancels all the spoofing bid orders, causing other market participants to do the same. This drive prices back down from these synthetically raised higher prices. When prices have dropped sufficiently, the spoofer then buys at lower prices to cover the short position and lock in a profit.

Spoofing algorithms can repeat this over and over in markets that are mostly algorithmically trading and make a lot of money. This, however, is illegal in most markets because it causes market price instability, provides participants with misleading information about available market liquidity, and adversely affects non-algorithmic trading investors/strategies. In summary, if such behavior was not made illegal, it would cause cascading instability and make most market participants exit providing liquidity. Spoofing is treated as a serious violation in most electronic exchanges, and exchanges have sophisticated algorithms/monitoring systems to detect such behavior and flag market participants who are spoofing.

The first case of spoofing got a lot of publicity, and those of you who are interested can learn more at https://www.justice.gov/usao-ndil/pr/high-frequency-trader-sentenced-three-years-prison-disrupting-futures-market-first.