SEBI’s Rule to Discourage Spoofing: Key Provisions & Timeline

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
  

• Increased volatility, particularly in illiquid stocks or derivatives
  

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:

Definition of Spoofing

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.

Surveillance Measures

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
  

Penalty Mechanisms

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
  

Prevention Through Algorithms

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:

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:

Traders and Investors

• 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
  

Brokers and Algo Providers

• 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
  

Market Infrastructure

• 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:

SEBI imposes strict penalties on entities found guilty of spoofing, including the following actions:

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.