[Shivangi Paliwal and Mahak Shinghal are final year B.A. LL.B. (IPR Hons.) and B.B.A. LL.B. (IPR Hons.) students at National Law University, Jodhpur]
Section 12A of the Securities and Exchange Board of India Act, 1992 [“SEBI Act”] read along with Regulation 3 & 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 [“PFUTP Regulations”] prohibits any person from engaging in fraudulent and unfair trade practices through the use of any manipulative device, insider trading, and substantial acquisition of securities or control.
In March 2021, SEBI issued a circular on “Order-based Surveillance Method-Persistent Noise Creators” [“Circular”] to address the issue of excessive modification and cancellation of orders placed on exchanges. If excessive order modification and cancellation lead to market manipulation i.e., when a trader creates a false appearance of market activity by entering multiple non-bona fide orders on one side of the market, at generally increasing (or decreasing) prices, in order to move that stock’s price in a direction where the trader intends to induce others to buy (or sell) at a price altered by the non-bona fide orders, it is referred to as “Spoofing” around the world.
Recently, SEBI passed an order regarding the trading activities of Nimi Enterprises wherein, it introduced the term “spoofing” for the first time, to describe the actions undertaken by Nimi Enterprises. In the order, SEBI defined Spoofing as “the unlawful practice of placing orders containing a large number of shares on one side of the market (buy/sell) and eventually executing orders containing relatively smaller quantities of shares on the opposite side (sell/buy) and cancelling the orders containing large orders.” The practice of spoofing is intended to create an artificial impression of pressure on one side of the market by placing large sized orders without any intention to execute them. The large sized orders create the impression of demand on that side of the market (buy/ sell) inducing other traders to also place orders on that side (buy/sell) of the order book.
Ruling in the Nimi Enterprises Order
Nimi Enterprises, a company engaged in securities trading in India, was under investigation for its trading activities to ascertain whether they were in contravention of the provisions of the SEBI Act and the PFUTP Regulations.
During the investigation, SEBI found that Nimi Enterprises had engaged in a pattern of trading that created an artificial impression of demand or supply for certain scrips. Specifically, Nimi Enterprises would place a large order for a security at a price substantially different from the prevailing market price. It would then place another order for the same security at a price closer to the market price but for a smaller quantity of shares. After executing this second order, they would cancel the first order containing a larger number of shares. Thereafter, based on this revelation, a Show Cause Notice [“SCN”] was served upon the Noticees.
Nimi Enterprises contended that the intention behind placing numerous large buy and sell orders and executing them with some orders being at prices higher or lower than the prevailing market price is based on the expectation that the price would increase or decrease due to various factors. However, some of the large orders were not executed and later cancelled in order to utilize the margin for trading in other stocks. Additionally, they asserted that they did not comprehend the term “spoofing” as mentioned in the SCN, nor was this term defined under any SEBI regulations. They further argued that they demonstrated their intention to execute the orders by fully disclosing them to the market participants, as a trader who does not wish to execute their order would not disclose it. Thus, there was no evidence to suggest any fraudulent intent behind the alleged trades.
The main point of contention for SEBI was whether the trading pattern by Nimi Enterprises was in violation of the provisions of sections 12 A (a),(b),(c) of the SEBI Act and regulations 3(a), (b), (c), (d) and 4(1), 4(2)(a) and (g) of the PFUTP Regulations.
SEBI, in its order, observed that the time difference between the execution of small orders and the cancellation of large orders was only a matter of seconds and this pattern was observed for several scrips on several trading days. This factual revelation exposed the recurring modus operandi employed by Nimi Enterprises as a customary trading practice.
Moreover, SEBI highlighted the norms of the Stock Exchanges requiring traders to disclose either a percentage of their total order to the market participants, which should not be less than 10% of the total quantity, or the entire quantity itself. Once the disclosed quantity is converted into trades, an additional quantity equivalent to 10% of the total ordered quantity becomes visible on the Order book. SEBI found that Nimi Enterprises intentionally fully disclosed the large orders placed by them in the Order book, on the other hand, when executing trades involving relatively smaller quantities in those same scrips, they chose to disclose only partial quantities of shares.
This factual matrix led SEBI to conclude that Nimi Enterprises placed the large orders without any intention to execute them and with a malicious intent to manipulate the price and volume of the scrip as they were able to buy or sell shares at prices which were determined based on non-genuine demand/supply inherent in those scrips, thereby harming the interests of other genuine investors in the securities market.
SEBI opined that the trading pattern employed by Nimi Enterprises was in violation of the SEBI Act and the PFUTP Regulations. Thus, SEBI restrained Nimi Enterprises and other individuals from accessing the securities market and prohibited them from engaging in any activities related to buying, selling, or dealing in securities, either directly or indirectly, and from being associated with the securities market for a duration of 2 years and 1 year, respectively. Additionally, a penalty of Rupees 25 Lakhs was imposed.
To both deter and detect spoofing practices, the 2021 Circular required exchanges to implement an additional order-based surveillance measure to deter persistent noise creators i.e., excessive order modifications/cancellations with an intent to avoid execution.
Conclusion
Market abuse or fraudulent transactions in securities create a lack of clarity, endanger the fairness of the market, and reduce the trust that investors have in the capital market. SEBI’s order along with the Circular is a positive step in achieving market transparency by creating scope for deterrence, detection and reporting of large scale and patterns of order cancellation and spoofing by traders.
– Shivangi Paliwal and Mahak Shinghal
