I have a piece in today's Financial Express with Rashmi Birmole and Pranjal Kinjawadekar on the somewhat novel fraud 'spoofing'. Here is the link to the original article and the full piece:
The stock markets have come a long way from the days of the open outcry system. Offers and bids for stocks, once shouted or hand-signaled on trading floors, now reside in electronic and anonymous order books. These books reveal more than just orders, they provide crucial information on bid-offer balance, market depth and the prices traders are willing to accept. Order books offer a glimpse into the push and pull of the market - a vital piece of the mosaic of information that shapes market prices. However, this leaves the order book open to manipulation or ‘spoofing’, a practice that usually involves placing non-bona fide orders of large quantity on one side of the market, while attempting to execute a bona fide order on the other side.
For instance, a trader places buy orders for huge quantities of ‘X’, but at a price that’s lower than the market price. The probability of his orders getting filled is fairly low, because common sense dictates that no seller would sell lower than the market. The bid, however, which may make up a sizeable portion of the order book, may signal higher demand for ‘X’ leading to other traders selling X at higher prices. The manipulative element kicks in when the trader also places a sell order at these prices, which are higher than they would have been if not for his own earlier buy orders. These fictitious orders, usually fully visible to the market, are designed to create an artificial impression of demand or supply. These buy orders are then conveniently cancelled after the trader books a profit and true to their name, are nothing more than a ‘spoof’ that the trader has no intention of seeing through.
While spoofing has been frequently reported and penalized in the United States (US), it remains relatively uncommon in the Indian markets. In this context, it is worth discussing the recent interim order passed by SEBI against Patel Wealth Advisors Private Limited (PWAPL), a stockbroker, and its directors, in connection with an elaborate and recurring scheme of ‘spoofing’ across the equity and derivatives segments of the Indian markets. SEBI’s analysis revealed that PWAPL allegedly manipulated the market over 292 scrip contract days spread over 173 different scrips, by placing large fake orders that it never intended to execute. These orders were meant to mislead other investors by creating a false impression of demand or supply. The regulator passed a series of directions against the broker and its directors, including indefinite trading restrictions on PWAPL, the impounding of over ₹3.22 crore in alleged unlawful gains and instructions against disposing of any their assets or properties.
In the case of PWAPL, SEBI’s investigation found that this strategy was not an isolated tactic but a sustained and repeated pattern. The firm would place large orders at prices far from the current market rate, then immediately place a smaller order on the opposite side at a more realistic price. Once those trades were executed at prices influenced by the spoofed demand or supply, the large orders were swiftly cancelled.
Seeing how 'spoofing' essentially revolves around manipulated order books, it is important for the regulator to identify the non bona-fide orders and deconstruct the manipulative scheme to satisfy the evidentiary burden of fraud. Since the cancellation or modification of limit orders (before they are executed) is an otherwise permissible activity, the regulator would also need to carve out illegitimate behavior from otherwise legitimate behavior, and identify cancelled orders that were placed with an intent to be cancelled and manipulate. This would require establishing patterns of such behavior and circumstances that indicate an intent to manipulate and the herculean task of sifting through vast volumes of unexecuted order activity, including placements, modifications, and cancellations. In 2025, with average daily orders reaching approximately 16 billion, such manipulations can occur in microseconds, often vanishing before it can be matched or executed.
In this context, SEBI’s action against PWAPL is not just a punitive measure but a reflection of its growing enforcement, surveillance and analytic capabilities. The regulator’s ability to detect and reconstruct these fleeting patterns of conduct signals a shift in its approach—one that is increasingly aligned with the demands of modern, high-speed markets. This isn’t SEBI’s first brush with spoofing. In an earlier case involving Nimi Enterprises, the regulator identified a similar pattern, albeit on a smaller scale. While that case involved fewer trades and lower gains, it served as an important precedent, reinforcing the principle that even in the absence of actual trade execution, conduct that creates a false or misleading appearance of market activity can be penalized.
The U.S. Securities and Exchange Commission (SEC) has tackled similar conduct under the label of “layering”—a specific form of spoofing where multiple fake orders are placed at different price levels to build a false illusion of depth. The U.S. regulators have successfully prosecuted cases under the Dodd-Frank Act, which explicitly prohibits spoofing in commodities and securities markets. This explicit inclusion also empowered the Commodity Futures Trading Commission (CFTC) and the Department of Justice (DOJ) to pursue spoofing not just through fines or market bans, but also through criminal prosecution in 2015, making Michael Coscia, an HFT commodities trader, the first person convicted under this law.
Spoofing and similar misconduct already fall within the broad anti-fraud umbrella of PFUTP regulations. These provisions broadly prohibit fraudulent, manipulative, or deceptive conduct in securities trading. In the above discussed cases, SEBI has successfully demonstrated that even in the absence of a statutory label, spoofing can be penalized when it results in a false or misleading appearance of market demand or supply. This framework enables SEBI to address a range of manipulative behaviours, whether old or emerging, without waiting for legislative catch-up. In a world where technology, algorithmic strategies, and high-frequency trading evolve rapidly, a highly codified regime may risk catching innocent actors in the net.
As algorithmic and high-frequency trading continue to reshape market dynamics, regulators will be expected to remain equally agile—leveraging surveillance tools, data analytics, and principles-based enforcement to detect and deter abuse. While the call for clearer legal definitions may grow louder, India’s current approach preserves regulatory adaptability without compromising accountability. The key lies in continuing to evolve enforcement practices, increasing transparency, and ensuring that market participants, whether institutional or retail, can trust that the playing field is level.
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