In a rare instance, Sebi has cracked the whip on “spoofing” by slapping a penalty of ₹3.22 crore on Patel Wealth Advisors — a Gujarat based stock broker — and barring its four directors from accessing the securities market.
In an order dated April 28, Sebi wholetime member Kamlesh Chandra Varshney said that spoofing is a type of manipulative trading activity which involves placing bid or ask orders, with the intent of cancelling the said orders before execution while simultaneously executing trades on the opposite side of the book.
The side (i.e. buy or sell) on which such large orders are placed and cancelled is known as the “spoof” side and the suspect trader involved in such kind of activity is known as “spoofer”.
A spoofer makes money by manipulating the order book by creating a false sense of demand or supply by placing large orders at a price which is far away from market prices.
Such large orders on one side of the order book influences market participants to trade. When such trading leads to movement in the price of the scrip, the spoofer trades on the opposite side of the book making unlawful gains.
An earlier instance was caught in 2023 with a partnership firm named Nimi Enterprises, but the spoofing activity was limited to the cash segment unlike this instance which involves both cash and derivatives.
In this case, Sebi’s examination revealed that the stock broker had allegedly placed multiple buy/sell orders in various scrips with large quantities at prices significantly below/above the prevailing market price, without intention of execution.
This created a false impression of increased demand/supply in the scrips, misleading the investors at large and affecting the price in the scrip. While its large orders were pending in the order books of various scrips, the broker had allegedly within a short timeframe, transacted on the opposite side in the market and earned wrongful gains.
Once the broker had allegedly executed its order on the opposite side of the book, a substantial part of the orders placed on the spoofing side were cancelled.
“After analysing all the evidences on record I hold that this is a fit case to exercise powers of passing interim order so as to insulate the securities market and to protect the unlawful gains, which may go beyond regulatory reach,” Varshney said in its order.
The regulator’s investigation uncovered such activity across 173 scrips over 292 scrip-days, sometimes multiple times in a day resulting in 621 unique spoofing instances.
“PWAPL has been repetitively involved in the manipulation of the order book, resulting in violation of the Sebi Act and PFUTP (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations.”
“Allowing it to continue its spoofing activities will severely erode the integrity of the securities market and harm the interest of investors.”