In a move to curb manipulation by fast-paced algorithmic traders, marker regulator SEBI and stock exchanges have decided to make ‘spoofing’ difficult.

‘Artificial volumes’

Simply put, spoofing is camouflaging. But in market parlance, it is a technique to distort the price of any scrip by pseudo volumes. Mostly, algo traders enter visible orders or a series of visible orders that either create a new best bid or offer price, or add significantly to the liquidity displayed at the existing best bid or offer. But before the order is executed, it gets cancelled. This creates artificial price and volumes for a scrip. This is a sort of manipulation since execution occurs at a more favourable price than the trader was likely to obtain in the absence of the artificial orders.

Co-location based algo traders are more likely to indulge in this game since they already have access to tick-by-tick data and the full order book compared to a normal trader who has only top five bid ask price details. Also, co-location traders-- since their servers’ proximity to an exchange’s master-trading engine-- can execute and cancel trades faster. Human hands cannot match the speed of co-location and algo traders.

Effective from April 5

SEBI and exchanges have said that measures to curb spoofing will be effective from April 5. Traders who repeatedly modify their orders without those trades getting executed will have their accounts disabled for a duration depending on the extent of violations. The rules will be applicable to daily trading activity at the client or proprietary account level.

The parameters for these measures are high order-to-trade ratio (OTR) in value terms, high number or instances of order modifications, and high percentage of order modifications leading to a persistent deferred or lower-order execution priority.

The instances identified based on these three conditions will be considered as “1 instance count.” The surveillance action based on the count of instances over a period of rolling 20 trading days will include trading disablement for first 15 minutes of trading (in the normal continuous market) at PAN level across the exchanges in the equity and equity derivatives segments. Simultaneously, provided the number of instances exceed 99 on a rolling 20 trading days basis, disablement will be carried out on the next trading day. Additional instance of repetitive violation on consecutive trading days by a client or proprietary account on a rolling 20 trading days basis will lead to trading disablement for a period subject to a maximum of 2 hours.

“The trading behaviour of entities creating undesirable noise in the market shall be monitored. Notwithstanding the above, if any entity is found to be repeatedly modifying/cancelling order(s) which results in non-execution of trades and/or creates undesirable noise in the system, such an entity will be liable for action even if the parameters of the surveillance action are not fully met,” the exchange circular said.

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