Mint Explainer: What Sebi's spoofing crackdown means for the stock market

Mint delves into the intricacies of spoofing, its detrimental impact on market integrity, and the broader implications of Sebi's action for brokers, traders and algorithmic trading operators.

What is spoofing?

Spoofing is a deceptive tactic through which traders strategically place substantial buy or sell orders at prices that differ significantly from the current market price. These orders are not intended for execution; instead, the goal is to create a false impression of either strong demand or overwhelming supply in the market.

The side on which these large, ultimately cancelled orders are placed is known as the "spoof" side, and the trader involved is termed a “spoofer". By injecting these phantom orders into the order book, the spoofer creates an artificial imbalance, influencing other market participants to react and trade based on this misleading signal.

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Once this induced trading activity causes the desired movement in the price of the underlying asset, the spoofer swiftly executes genuine trades on the opposite side of the order book. This allows them to capitalise on the artificially created price difference and generate illicit profits.

What did Sebi's investigation reveal?

Sebi's investigation into PWAPL's trading activities spanned January 2022 to January 2025, and included a detailed forensic analysis of it trading patterns. The regulator used sophisticated, multi-layered surveillance techniques and advanced data analytics to examine PWAPL's trading behavior across 292 scrip-contract days, covering 173 different stocks.

This thorough scrutiny revealed recurring instances of substantial orders being placed and then rapidly cancelled. Sebi identified "spoofing patches" on both the buy and sell sides, indicating a systematic approach to manipulation across various market segments. 

PWAPL's alleged spoofing activities extended beyond the cash equity market into equity derivatives, including futures contracts. The investigation highlighted instances in which more than 99% of the order quantity was cancelled, strongly suggesting a deliberate intention to mislead other market participants.

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By meticulously analysing trade-level data, Sebi back-calculated the intra-day square-off gains allegedly accrued through these manipulative strategies. In just two illustrative examples—Coffee Day and Syrma SGS Technology—the regulator estimated that PWAPL earned ₹13.44 lakh in a single day using these tactics.

Sebi concluded that PWAPL engaged in extensive spoofing activities in both the cash and derivatives segments over a three years, resulting in unlawful gains amounting to ₹3.22 crore.

It directed the impounding of the amount, with joint and several liability assigned to the accused parties, including PWAPL and its directors. Additionally, PWAPL has been barred from dealing in securities in its proprietary account, and its directors have been restrained from trading directly or indirectly until a final order is issued.

What does Sebi's order signify?

Experts view Sebi's recent order against Patel Wealth Advisors (PWAPL) as a strong signal of its commitment to tackling sophisticated market manipulation like "spoofing" through advanced data surveillance. The order details PWAPL's alleged use of algorithmic strategies to distort equity and derivative prices over three years. Spoofing involves placing and quickly cancelling large orders to create a false sense of market demand or supply, thereby misleading other traders and generating illicit profits.

Sebi's investigation revealed patterns of large order placements and rapid cancellations by PWAPL across 173 stocks, leading to an estimated ₹3.22 crore in unlawful gains. The regulator has impounded this amount and restricted PWAPL and its directors from trading.

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Sandeep Parekh of Finsec Law Advisors said the order was significant, given the rarity of such cases and the substantial profit involved. "Given the final number of over ₹3 crore worth of profit, it appears to be of somewhat large scale," he said, suggesting that PWAPL disregarded earlier warnings. Parekh added that Sebi had likely demonstrated manipulative intent, and that he didn't foresee new burdens for algorithmic traders or a need for new laws.

Meanwhile, Hemen Asher, Partner at Bhuta Shah & Co LLP, a taxation firm, asked if Sebi's stance meant that brokers heavily involved in proprietary trading couldn't provide two-way quotes, given that much of algorithmic trading involves rapid, complex buy-sell orders triggered by specific conditions.

Does 'spoofing' need to be defined?

Sebi acknowledged that "spoofing" isn't explicitly defined under its Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market (PFUTP) regulations but argued that the practice falls under prohibited activities, citing the Nimi Enterprises case as a precedent. In 2023, the regulator found Nimi Enterprises to have engaged in spoofing in the cash segment across 16 scrips over the course of 58 scrip-days, which resulted in unlawful gains of around ₹52.55 lakh.

While some experts suggested Sebi create a formal definition for clarity, others such as Tushar Kumar, Supreme Court lawyer said broad regulations offered better flexibility to combat evolving manipulative tactics. "Leaving spoofing and similar misconduct within the ambit of broad anti-fraud regulations like PFUTP preserves regulatory flexibility and ensures that market protection keeps up with innovation," Kumar said.

He also said Sebi's approach was likely to be upheld in court. "Indian courts and tribunals have historically upheld Sebi’s expansive interpretation of PFUTP to cover evolving market abuses. Even if challenged, Sebi’s reliance on PFUTP to prosecute spoofing is likely to withstand judicial scrutiny, provided the evidence establishes an intent to deceive or manipulate," Kumar added.

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Former Sebi officer Sumit Agrawal pointed out that India lacked specific laws for spoofing. "The reliance on precedents like the Nimi Enterprise order, now stayed by the Securities Appellate Tribunal (SAT) and under challenge, illustrates the fluid legal terrain and the ongoing judicial scrutiny around the foundational principles underpinning Sebi’s spoofing jurisprudence," he said.

Agrawal also said that when enforcement relies heavily on interpretative inferences and non-final precedents such as Nimi's, the need for legal clarity is paramount. "The broader concern is the increasing reliance on general and widely worded provisions, which can render outcomes variable depending on the interpretational approach of a Whole Time Member of the day", he said.