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Spoofing is a market manipulation tactic involving fake orders to mislead investors and distort prices. To curb this, SEBI has implemented rules to detect and penalise such behaviour. This article explains SEBI’s anti-spoofing framework, detection methods, and its impact on traders and market participants.
Spoofing is a deceptive trading practice where a trader:
Places large buy or sell orders to influence market prices
Cancels those orders before execution
Executes a smaller, opposite-side order to benefit from the price shift caused
For example, placing multiple large buy orders to push the price up and then selling at that inflated price before cancelling the original buy orders.
Effective April 5, 2023, SEBI penalizes traders who place and cancel orders excessively to mislead the market. If a trader breaches the defined order-to-trade limits 99+ times in 20 trading days, their account is blocked for 15 minutes the next day, with each further breach adding 15 minutes (max 2 hours). The aim is to curb artificial price moves and protect market integrity.
Spoofing can lead to:
False price discovery
Unfair advantage to manipulators
Loss of trust among retail and institutional investors
SEBI’s role includes ensuring fair and transparent market practices. To curb manipulative activities like spoofing, SEBI has enhanced surveillance systems and introduced targeted regulations.
SEBI’s anti-spoofing framework outlines clear definitions, enforcement mechanisms, and preventive measures, as detailed below:
SEBI officially defined spoofing as placing large visible orders without genuine intent to execute, followed by cancellation of those orders and simultaneous execution of an opposite-side trade.
Stock exchanges are mandated to:
Track patterns of frequent order placement and cancellations
Identify high-frequency traders or algo strategies using spoofing techniques
Use AI and machine learning to detect anomalies in trading behaviour
Traders and brokers found guilty of spoofing face:
Monetary penalties under SEBI regulations
Suspension or cancellation of trading access
Prosecution under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003
Brokers must ensure that:
Algo strategies deployed are not misused for spoofing
Order-to-trade ratios remain within prescribed limits
Internal controls and real-time alerts are in place for suspicious activity
SEBI has introduced anti-spoofing measures in a phased manner over the years. Key regulatory milestones include:
Date |
Regulatory Step |
|---|---|
Aug 2017 |
SEBI issues circular warning against order placement abuse |
Jan 2018 |
Stock exchanges instructed to monitor spoofing via trade data |
Dec 2019 |
SEBI proposes stricter compliance and surveillance norms |
Apr 2022 |
Draft regulations issued to define spoofing and prescribe penalties |
Aug 2023 |
Final anti-spoofing rules notified and implemented |
These rules are enforced under:
SEBI (PFUTP) Regulations, 2003
SEBI Act, 1992
Rules governing algorithmic and high-frequency trading
SEBI may also initiate proceedings in the Securities Appellate Tribunal (SAT) if required.
SEBI’s anti-spoofing rules impact various market participants, each with specific responsibilities to ensure fair trading practices:
Must avoid order strategies that resemble spoofing
Need to maintain fair and transparent trading intentions
Retail traders using algos must ensure orders reflect genuine execution plans
Need to vet and test algorithmic trading strategies
Must comply with order-to-trade ratio thresholds
Subject to audit and inspection for repeated spoofing alerts
Exchanges must implement automated detection tools
Reports on suspicious trades are shared with SEBI for enforcement
While cancellations are part of normal trading, spoofing is identified based on intent and pattern. Here’s how the two differ:
Factor |
Spoofing |
Legitimate Trading |
|---|---|---|
Intent |
Mislead market |
Execute real trade |
Execution |
Cancellations are dominant |
Executions occur as planned |
Pattern |
Rapid placing and cancelling |
Normal order revisions |
Regulatory View |
Punishable offence |
Acceptable under trading norms |
SEBI imposes strict penalties on entities found guilty of spoofing, including the following actions:
Type |
Description |
|---|---|
Financial Penalty |
Up to ₹25 Crores or three times the profit made (whichever is higher) |
Trading Ban |
Temporary or permanent trading suspension |
Legal Action |
SEBI can initiate criminal proceedings in extreme cases |
Spoofing distorts market integrity and misleads genuine investors. SEBI’s strict regulations and penalties aim to curb this practice, urging traders and brokers to act responsibly. Stronger enforcement helps build a more efficient and trustworthy market.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Spoofing involves placing and cancelling large orders to mislead, while layering uses multiple price levels to create a false market trend.
Yes. If their trading activity fits the pattern defined as spoofing, SEBI can investigate and impose penalties, regardless of trade volume.
No. Only orders placed without genuine intention to execute, especially when paired with opposite trades, are considered spoofing.
To detect spoofing, regulators and exchanges monitor practices such as placing large orders without intent to execute, repeatedly cancelling orders, creating artificial price movements, and unusual order-to-trade ratios that may signal manipulative activity.
Spoofing is a market manipulation practice where traders place large orders without intending to execute them, creating false demand or supply signals. This can mislead other investors and distort price discovery in the stock market.
Stock exchanges, clearing corporations, and brokers are primarily responsible for ensuring compliance with SEBI’s rules against spoofing. SEBI oversees the regulatory framework, conducts inspections, and can take enforcement action when manipulative practices are identified.
SEBI uses advanced surveillance systems, algorithmic monitoring, and trade data analysis to detect spoofing. Indicators include unusual order cancellations, abnormal order-to-trade ratios, and repetitive patterns that suggest manipulation rather than genuine trading activity.
SEBI has strengthened its anti-spoofing framework over time, with guidelines on algorithmic trading and order-to-trade ratios introduced in the 2010s. Specific rules targeting order cancellations and market manipulation have been updated periodically to enhance market integrity.
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