How the new SEBI rule on spoofing will support retail investors

Spoofing is where someone places a bulk order and then cancels them before they are fulfilled.

April 02, 2021 / 01:08 PM IST

Spoofing is where someone places a bulk order and then cancels them before they are fulfilled. It is a form of trading that can manipulate markets by generating the perception of demand (or supply) where actually there is no demand (or supply). Since traders are prompted to respond as a result of such shifts, markets move dramatically.

Order to Trade Ratio (OTR)

The ratio of an order's cumulative number of submissions, modifications, and cancellations to the number of trades it generates on the exchange is calculated as OTR.

What is OTR Framework?

The OTR framework was created to prevent traders from manipulating the order book by placing large (fake) orders without executing them. Furthermore, the accumulation of orders places a burden on the exchange infrastructure. Concerns over order flooding and lack of opportunity to genuine traders were addressed.

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So, in 2009, SEBI created a system to counter these types of actions, with each violation resulting in a penalty for the trader. To ensure proper liquidation, SEBI recommended that exchanges enforce a penalty if order prices placed by more than 1 percent from the Last Traded Price (LTP) on either side, but this was later reduced to 0.75 percent.

Circular on March 26, 2021

The regulatory, in partnership with the exchanges, had floated the new circular with respect to the surveillance measures in order to curb the Noise or to identify the Noise creator in the exchange. According to the circular, the surveillance measure will be applied to everyday trading operations at the Client / Proprietary account based on three main criteria.

1> A high Order to Trade Ratio (OTR) in value term
2> Order Modifications in Large Numbers/Instances

3> A high percentage of orders are modified, resulting in a deferred/lower order execution priority.

The action will be taken based on a count of instances over 20 rolling trading days. The instances identified based on the above three parameters will be counted as "one instance count."

The action for these will be as below:

1> Trading will be suspended on the Stock and Equity Derivatives segments for the first 15 minutes of trading at the PAN level around the Exchanges for such a Customer/Proprietary Account.

2> Any additional instance of persistent violation by a Client proprietary account (say N times) will result in trading disablement for a period of 'N' instances X 15 minutes on a rolling 20 trading day basis, subject to a Maximum disablement of 2 hours.

For Example:

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The benefit to the Retailers

As a retail trader who truly wishes to profit from the market, you can sometimes be influenced by large players who have an edge over retail traders. The new rules may favour retailers because they can help to reduce excessive market noise, and which may create a false demand and supply of stocks.

Since retail traders do not deal in large quantities or change their orders as often as institutions, this step will favour them and provide the market with the correct demand and supply direction. A 50 order-to-trade ratio is very high and can cover most genuine cases. It would mainly influence those who put orders with the intent of generating false demand/supply.

These will be effective from April 5, 2021, and the first action will be taken on May 5, 2021, based on the rolling 20-day trading window.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Gaurav Garg is Head - Research & HCM at CapitalVia Global Research Limited- Investment Advisor. He has done Masters in Personnel Management and Industrial Relations (PMIR) from XLRI and B Tech from NIT.
first published: Apr 2, 2021 01:08 pm

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