To curb instances of ‘spoofing’ in the stock market, commodities and capital market regulator Securities & Exchange Board of India (Sebi) has announced a set of measures to be effective April 5. From that date, traders who repeatedly modify their orders without those trades getting executed will have their accounts disabled for a duration depending on the extent of violations.

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Spoofing is an algorithmic trading activity designed to influence prices by creating an illusion of demand or supply. Spoofers place a large number of buy or sell orders, with an intent to cancel before those orders can be executed.

A large number of such orders creates an illusion of a sudden increase in demand or supply, which in turn prompts a reaction from other traders, and causes prices to swing sharply.

The new measures shall be applicable on the daily trading activity at the client or proprietary account level in a security or a contract. The parameters for these measures are high Order to Trade Ratio (OTR) in value terms, high number or instances of order modifications, and high percentage of order modifications leading to a persistent deferred or lower-order execution priority.

The instances identified based on these 3 conditions shall be considered as “1 instance count”, according to the circular issued by exchanges NSE and BSE dated March 26.

The surveillance action based on the count of instances over a period of rolling 20 trading days is as under:

- Trading disablement of such a client or proprietary account for a time period of first 15 minutes of trading (in the normal continuous market) at PAN level across the exchanges in the equity and equity derivatives segments simultaneously provided the number of instances identified as above exceed 99 on a rolling 20 trading days basis. The disablement shall be carried out on the next trading day.

- Any additional instance of repetitive violation on consecutive trading days by a client or proprietary account (say N times) on a rolling 20 trading days basis will lead to trading disablement for a period of ‘N’ instances X 15 mins, subject to a maximum disablement of 2 hours.

In addition to the parameters and surveillance actions, the circular said that the parameters of the surveillance action are dynamic in nature and shall be reviewed periodically.

“The trading behavior of entities creating undesirable noise in the market shall be monitored. Notwithstanding the above, if any entity is found to be repeatedly modifying/cancelling order(s) which results in non-execution of trades and/or creates undesirable noise in the system, such an entity will be liable for action even if the parameters of the surveillance action are not fully met,” the circular said.

These surveillance measures shall be effective from April 05, 2021, and the first surveillance action on such Persistent Noise Creators shall be on May 05, 2021 based on 20 trading days window.

Nithin Kamath, Founder & CEO, Zerodha, in a tweet said that the measures were positive for retail traders.

"Spoofing & Quote stuffing- orders placed with no intent to execute will reduce significantly,” he tweeted.

First Published:Mar 29, 2021 5:41 PM IST