5 reasons to sit up and take notice of Sebi's recent order-spoofing crackdown

Order-spoofing involves placing phantom or fake buy/sell orders to "bait" investors. These fake orders create a false sense of high demand/supply and the spoofer takes an opposing trade (of sell/buy) to profit from it.

Also read: SEBI cracks India's first big "spoofing" case that involved a stock broker and 173 stocks

Here are the five reasons why this order triggered Sebi's surveillance and investigation mechanism.

1. The first challenge lies in proving 'intent'. A regular pump-and-dump investigation gives concrete evidence like trades taken and financial gains made, but in an order-spoofing investigation, regulatory officials have to work with circumstantial evidence to prove intent.

An expert on Sebi regulations said: "Manipulative trade patterns involve executed trades: You can see real, actual changes in price, volume, LTP (Last Traded Price), closing price, etc.

"Manipulative order patterns involve only orders placed (or cancelled or modified) — not executed: Orders may never get filled. Therefore, no real transaction happens. The regulator must show intent — that the order was placed just to mislead — which is subjective and tricky.

"Thus, proving manipulation at order stage is difficult because no financial transaction actually occurred — only an intention to deceive must be inferred, often from circumstantial evidence."

2. Then, there is massive amounts of data to be sifted through. For example, 16 billion orders are placed daily (NSE/BSE combined) but only about 100 million trades actually get executed daily. That is, ~99.4 percent of orders never get executed. In regular pump-and-dump operations, only the remaining trades (or ~0.6% of the orders) need to be examined. In order-spoofing, all 100 percent need to be examined.

Therefore, as the expert said, "it is like finding needle in a haystack".

"Sebi officials will need to analyse not just what orders were placed, but why they were placed, when they were cancelled, how they affected the order book, etc. Intent must be inferred from billions of electronic messages — not obvious outcomes."

"Proving trade-based manipulation (executed trades) is easier because the data set is much smaller and the consequences are visible. Proving order-based manipulation is harder because the "signal" (bad intent) is drowned in massive "noise".

3. It showcases Sebi's new surveillance capabilities, which has until been seen in more advanced markets. The Sebi order noted: " Advanced economies, such as the US, have been at the forefront of identifying and taking punitive action in matters involving spoofing, including such instances where one entity spoofs and another benefits by trading on the other side. This order exemplifies how Sebi has developed capabilities for identifying such complex and extensive order book manipulations."

4. This was the first big order spoofing operation Sebi has unearthed. An earlier investigation, for which an order was passed in 2023, showed how a partnership firm, Nimi Enterprises, had done order-spoofing but in a much smaller scale and for a shorter duration.

With Nimi Enterprises, Sebi observed spoofing activity only in the cash segment and was done over eight months. In PWAPL's case, the spoofing activity was tracked and identified over cash and derivatives segments and the activity was done over three years.

With Nimi Enterprises, the spoofing involved 16 unique scrips across 58 scrip-days, while PWAPL's spoofing activity involved 173 scrips across 292 scrip-days. Also, PWAPL did spoofing activity multiple times on several days. Therefore, Sebi officials had spotted 621 unique spoofing instances.

5. It saw a Sebi-registered stock broker, PWAPL, openly violating regulations over an extended period of time. As Sebi's Whole-time Member Kamlesh Varshney wrote in the order, when explaining why this case was unique, "I note that the unlawful conduct of PWAPL, a regulated market intermediary, over an extended period of time, at such a large scale and with blatant disregard for regulatory oversight makes this case unprecedented and calls for urgent intervention to protect the integrity of the securities markets."