What is spoofing in the stock market?
Spoofing is a form of market manipulation in which a trader places orders to buy or sell particular security but has no intention of keeping them. He cancels or modifies the orders and eventually make a profit out of them. Let me clarify it with an example.
Mr X places a Buy order of 500 shares of ABC enterprise. This will increase the demand for the particular stock in the market. Due to this, the price of the stocks of ABC enterprise will rise. While the demand is increasing in the market the spoofy will simply cancel the order and sell the shares he already holds. He could able to make a false demand and he could gain a higher profit than he expected.
SEBI’s new Anti-spoofing rule
It is usually normal for traders to make changes cancel orders while trading, particularly small investors. But when you are dealing with a large sum of orders, that will create unwanted movements in the market. The regulator of the Indian Capital and Commodities market SEBI, want to have control over spoofing. SEBI issued a circular that details the various parameters and rules for penalising those involved in spoofing on March 26, 2021.
Starting from April 5 2021, SEBI will start penalising all those involved in spoofing activities by suspending their trading account temporarily. So anyone who makes excess modifications or cancellations to the orders placed will have to watch out for their heads.
Listed below are three parameters that are set to evaluate and penalise traders who do spoofing
High Order to Trade Ratio (OTR) in terms of value.
When a trader has a high number of instances or modifications of the order made.
And making a high percentage of order modifications but a deferred or lower execution.