In a bid to make the Indian securities market free of manipulative trading and spurious movement in prices, the Securities and Exchange Board of India (Sebi) has made excessive modifications and cancellations in stock market orders a punishable activity. This is effective April 5.

This is also known as spoofing.

Any violation of this new rule could lead to a temporary suspension of the trading account.

Read on to find out more about the new rule, what is meant by spoofing and how it affects you.

What Is The New Rule?

From April 5 onwards, stock market traders who try to modify their orders repeatedly without really placing the orders will face the Sebi axe. Their accounts will be disabled for 15 minutes to 2 hours immediately on detection of the violation.

The duration of the ban will depend on the extent of the violation.

What Is Meant By Spoofing?

Spoofing is an algorithmic trading activity that traders use to create a perception of demand for a particular stock. Traders, who engage in spoofing, usually place a large number of orders but cancel them at the last moment. 

While cancelling intraday orders may be normal for smaller traders, when a large number of orders are placed, it impacts the price even before the order is executed. Spoofers cancel such large orders right before execution to influence the price by creating a false perception of demand.

According to the National Stock Exchange (NSE), such activities create an “undesirable noise” in the market.

How Will The New Rule Be Implemented?

The new measures will be applicable on daily trading activities. Three crucial parameters will be considered

  1. a) high order to trade ratio
  2. b) high number of order modifications
  3. c) high percentage of order modifications

Violation in all the above three conditions will be considered as one instance.

Even if these parameters are not fully met, Sebi has noted that any entity repeatedly modifying and cancelling orders which do not result in execution and creates undue noise will also face Sebi’s action.

Let’s understand how the penalty will be levied in two scenarios:

Scenario 1: if the number of instances crosses 99 on a rolling 20 trading days basis, the trading account will be disabled for the first 15 minutes of the next trading day.

Scenario 2: Any additional instance will lead to a longer disablement of a trading account subject to a maximum of 2 hours. Sebi has provided a calculation to arrive at the duration for traders.

Trading account disablement duration= ‘N’ instances x 15 minutes

Suppose for trader A there were 110 instances where A violated the rules. 

Here the additional instances are 11. (110-99)

So for our example, N=11. 

A’s account will be disabled for:

(11X15) minutes= 165 minutes

165 minutes works out to 2 hours and 45 minutes.

However, the maximum cap is 2 hours. 

So for our example, A’s account will be disabled for 2 hours.

Number of repetitive consecutive  instances of violation (N) Applicable trading disablement period
15 Mins
30 Mins
60 Mins
90 Mins
120 Mins/2 Hrs 
10  120 Mins/2 Hrs
Source: NSE Circular

As of now, 10 or more repeated violations will lead to the disablement of 2 hours.

How Does It Impact You?

The order was passed by Sebi, mostly keeping retail interests in mind. Excessive cancellations of large orders lead to manipulative increases or decrease in prices that ultimately impacts retail traders. A reduction in spoofing is expected to lead to more stability in prices without any undesirable fluctuations. It will also help retail traders and investors to maintain calm while taking decisions in the market.