Sebi Cracks Rs 3.2 Crore Mega ’Order Spoofing’ Scam Involving 173 Scrips - Check Details

Sebi News: The Securities and Exchange Board of India (Sebi) released an interim order on April 28 against a brokerage firm called Patel Wealth Advisors Private Ltd (PWAPL) and its directors Denish Maheshbhai Patel, Mitul Umedlal Vora, Kaushal Vasantrai Patel and Minish Maheshbhai Patel.

The market regulator has alleged that the brokerage firm made unlawful gains by indulging in ‘order spoofing’. The Sebi added that the illegal activities undertaken by PWAPL cotinued even after the brokerage received repeated letters and communication from NSE.

Notably, the directors of the company have been prohibited from accessing the securities markets. Sebi directed banks and depositories that no funds should be debited from the directors’ accounts without its permission. The market watchdog also directed the directors of the brokerage to furnish a complete inventory of all their assets and details of companies in which they hold substantial or controlling interest.

What Is Order Spoofing

As per Sebi’s interim order, the term ‘Order Spoofing’ refers to a form of manipulative trading practice in which traders place orders with the motive of cancelling them before they are fulfilled while executing trades on the opposite side of the book at the same time.

Notably, the side on which large orders are placed and cancelled is called the ‘Spoof’ side and those who place such orders are called ‘Spoofers’. The large order placed by the Spoofer creates a false demand or supply for the scrip as the order is typically placed at a price which is much higher or lower than the last traded price of the stock.

The false demand or supply created by such orders influences other participants to trade in the scrip, which in turn leads to movement in the price of the scrip. When the movement happens, the Spoofer trades on the opposite side of the book and reaps unlawful gains.

What Was Patel Wealth Advisor’s Modus Operandi

Sebi alleged that PWAPL allegedly placed fully disclosed buy and sell orders in various scrips with large quantities at prices significantly below or above the market price, without the intention of executing the said orders.

These pending orders in turn created a false sense of heightened demand or heightened supply which in turn misled investors and affected the price of the stock.

The market regulator also alleged that PWAPL transacted on the opposite side of the market and earned unlawful gains after placing the orders.

After the execution of orders on the opposite side of the book, a substantial number of orders on the spoofing side were cancelled. The market watchdog found in its investigation that the brokerage firm found that in most of the spoof orders, the quantities of the orders were fully disclosed while the genuine orders were only partially disclosed.

The Sebi added that such manipulation can disrupt market integrity and mislead other market participants. Notably the buy and sell pattern used by the brokerage was deployed in order spoofing 173 different scrips over the course of 292 contract days.

Sebi’s Measures To Curb Order Spoofing

Sebi said in its order that the term “spoofing” is not officially mentioned in the Prohibition of Fraudulent and Unfair Trade Practices Regulations (PFUTP). However, the technique used by such scammers is covered within the ambit of ‘prohibited dealings’ section of the regulations. Notably, the section 12A of the SEBI Act read with regulations 3 and 4 of the PFUTP Regulations prohibits any enitity from engaging in fraudulent and unfair trade practices and spoofing activities.

“No person shall directly or indirectly— (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognised stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with the issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder,” Sebi said.

Across the globe, malpractices such as spoofing or ‘layering’ are seen as a serious violation of securities laws. Earlier in 2023, the regulator found Nimi Enterprises (supra) 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 Rs 52.55 lakhs.