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

Spoofing involves placing large, phantom orders that are disclosed but way below the market price to create a false impression of demand.

A stock broker who "spoofed" orders to create an artificial demand for stocks, and its associates, have been asked to return over Rs 3.22 crore illegal gains made.

Patel Wealth Advisors Pvt Ltd (PWAPL) has been from accessing the securities market from its proprietary account, and its directors have been banned from the market.

In an order issued on April 28, the Securities and Exchange Board of India (SEBI) detailed how the investigating officials unmasked a tactic that has been used in the global markets but was observed for the first time at such a big scale in India. The earlier instance was caught in 2023 with a partnership firm named Nimi Enterprises. But that spoofing activity was limited to the cash segment for eight months, while the present case involving PWAPL involved both cash and derivatives segment and was done over three years. The regulator's PWAPL investigation uncovered such activity across 173 scrips over 292 scrip-days, sometimes multiple times in a day resulting in 621 unique spoofing instances.

Spoofing involves placing large, phantom orders that are disclosed but way below the market price to create a false impression of demand. These orders are not meant to execute but are meant to bait investors, who see them as genuine demand, and rush in to join the rally.

In the order, SEBI's Whole-time Member Kamlesh Varshney described order spoofing: "Order 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 “Spoof” side and the suspect trader involved in such kind of activity is known as “Spoofer”.

"A spoofer manipulates 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 creates asymmetry in the book, thereby, influencing other 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 thereby making unlawful gains. "

On the need to pass an interim order, Varshey cited the repeated instances of PWPL both on the buy and sell side. Varshney noted, " allowing PWAPL to continue its spoofing activities in the market will severely erode the integrity of the securities market and harm the interest of investors".

He added, "The order spoofing is a manipulative, fraudulent and unfair trade practice employed by PWAPL to deceive other market participants and profit from price fluctuation they induced unwary investors in the market. This practise distorted market prices and undermined market efficiency."