Sebi cracks down on pseudo buy and sell orders designed to deceive

Exchanges announce curbs to reduce trade orders aimed at manipulating the market; serial offenders could face trading disablement of up to two hours

The Securities and Exchange Board of India (Sebi) has trained its guns on ‘spoofing’ and ‘quote stuffing’—stock market jargon for pseudo buy or sell orders aimed at deceiving other traders.

Stock exchanges have put in place a new order-level surveillance mechanism to deter such practices. Under the new guidelines, serial offenders could face trading disablement ranging between 15 minutes and two hours.

“There shall be an additional order based surveillance measure to deter persistent noise creators, that is excessive order modifications and cancellations with an intent to avoid execution,” NSE has said in a circular dated March 26.

The new measures put in place will be applicable on the daily trading activity at the customer level as well as the broker level. NSE has issued three parameters to flag off such practices. These include high order-to-trade ratio, high instances of order modifications and persistent deferred or lower order execution priority due to frequent modifications. If the surveillance system detects of three activities, it will be considered ‘one instant count. Based on count of instances over a period of 20 trading days, exchanges will determine the penalty.

If the count exceeds 99 on a rolling 20-trading day basis, the client or a broker trading will face trading disablement for 15 minutes. Any additional instance of repetitive violation on consecutive trading days will lead to trading disablement for 15 more minutes up to a maximum of two hours.

“This is a positive for retail traders. Spoofing and quote stuffing orders placed with no intent to execute will reduce significantly,” Nithin Kamath, Founder & CEO, Zerodha has tweeted.

Quote stuffing is the practice of quickly entering and then withdrawing large orders. Such activity is done with an intention to gain an edge over competitors. The large orders disrupt other traders, who lose time in processing the orders. Meanwhile, spoofing (also called as layering) is placing large buy or sell orders at multiple price points in order to create an illusion of huge demand or supply. The spike in bull or sell orders prompts other traders to react. As the stock price moves such orders in the system are withdrawn.

Market players said such practices are typically used by high frequency traders (HFT) and algorithmic traders. Given the preponderance of HFTs and algo trades, the curbs issued by Sebi and exchanges are much-needed to protect the market integrity, said an analyst requesting anonymity.