• 22 May 2025

Spoofing in the Stock Market: The Invisible Scam Targeting Retail Investors: Explained with SEBI Action & Orders

Introduction: A Fraud Hidden in Plain Sight

In a highly digitized trading ecosystem, where milliseconds determine gains or losses, spoofing has emerged as one of the most deceptive market manipulation tactics are executed not by retail investors, but often by high-frequency traders (HFTs), brokers, or algo-enabled trading entities. The Securities and Exchange Board of India (SEBI), though constrained by the civil character of Indian securities law, has stepped up its surveillance and enforcement under the SEBI Act, 1992 and PFUTP Regulations, 2003.

In this article, we explore what spoofing is, how it operates, the legal framework SEBI uses to tackle it, and why Indian law is evolving in parallel with international jurisprudence such as the landmark U.S. case SEC v. Lek Securities Corp.. We focus on two significant Indian orders: SEBI v. Nimi Enterprises (2024) and the Interim Order against Patel Wealth Advisors Pvt. Ltd. (2025).

What is Spoofing?

Spoofing is a market manipulation technique wherein a trader places large buy/sell orders with no intention of executing them, merely to create a false sense of demand or supply. Once prices move based on that illusion, the spoofer cancels the fake orders and executes real trades on the other side for profit.

Spoofing is often paired with layering, where multiple price levels are simultaneously spoofed to deepen the illusion, making it seem like there's market depth or pressure. This is particularly dangerous in illiquid securities, where retail investors are more likely to be trapped.

Legal Framework in India: No Criminal Provision Yet

India currently lacks a specific criminal provision to prosecute spoofing. SEBI, therefore, proceeds under:

• Regulation 3 and 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 – which prohibit acts designed to mislead or manipulate the market.
• Sections 11, 11B, and 15HA of the SEBI Act, 1992 – empowering SEBI to investigate, impound gains, and impose penalties for fraudulent trades.

These laws frame spoofing as a civil wrong and allow for penalties like bans, disgorgement, and interest recovery — but not criminal conviction or imprisonment, as in jurisdictions like the USA under the Dodd-Frank Act or Commodity Exchange Act.

Key SEBI Actions: Case Analysis

1. SEBI Final Order – Nimi Enterprises (2024)

In this case, SEBI’s surveillance system flagged Nimi Enterprises for consistently placing large sell orders above the last traded price, while simultaneously placing buy orders just below the LTP. SEBI concluded that this created a misleading appearance of market depth.

• Violation: Sections 15HA of SEBI Act and Regulation 3 & 4 of PFUTP Regulations
• Impact: ₹52.55 lakh in unlawful gains
• Action Taken: Trading ban, interest recovery, and monetary penalty

The Nimi case became a milestone, showcasing SEBI’s capability to reconstruct trade trails and identify intent through systematic spoofing patterns across 58 sessions. It also demonstrated SEBI’s use of “intent inference from pattern behaviour”, compensating for the lack of confessional evidence.

2. SEBI Interim Order – Patel Wealth Advisors Pvt. Ltd. (28 April 2025)

This case escalated the conversation. Here, spoofing was clubbed with layering, executed across both the cash and derivatives segments.

• Findings: ₹3.22 crore of ill-gotten gains through simultaneous spoofing-layering
• Order Basis: Section 11B of SEBI Act provides for interim prohibitions and impounding
• Reference: SEC v. Lek Securities Corp., where the U.S. SEC defined layering as the act of placing multiple, non-bonafide orders to simulate interest, only to cancel them before execution

SEBI relied on international precedents not for binding authority, but for interpretative aid, strengthening the Indian position that such acts qualify as deceptive conduct under PFUTP norms.

Spoofing and Market Harm: Why It Matters

Spoofing distorts:

• True price discovery
• Investor confidence
• Market integrity

While institutional investors may deploy counter-algorithms, retail investors are the worst hit, falling for false price movements or being lured into pump/dump cycles.

SEBI has highlighted this impact in its orders, stating that manipulated depth perception leads to retail entry at non-equilibrium prices, causing real financial loss, despite the manipulation being virtual in nature.

SEBI’s Regulatory Challenges and Evolution

Challenges:

• Spoofing involves fast, cancellable trades, often within milliseconds
• Requires reconstruction of intent involving a difficult task without audio/video proof or internal communication logs
• SEBI does not have criminal jurisdiction, unlike the U.S. SEC (Securities Exchange Commission) + DOJ (Department of Justice) combination. 

Evolution:

• Introduction of order-to-trade ratio (OTR) flags
• Use of high-frequency surveillance tools and behavioural analytics
• Greater reliance on interim orders to prevent further market abuse
• Strategic invocation of Section 11B for restraining entities even before final adjudication

Comparison with International Frameworks

In the United States, spoofing is a federal crime, especially after the 2010 Dodd-Frank Act, which amended the Commodity Exchange Act to explicitly criminalize spoofing (Section 747).

In SEC v. Lek Securities Corp., layering was criminally prosecuted, with email evidence showing trader intent. The case emphasized that even if a trade is technically legal, the intent behind its placement is key to determining fraud.

In India, lacking such a clause, SEBI uses Regulation 4(2)(a), (e), (g) and (k) to argue that spoofing constitutes a deliberate “misleading impression of trading” or “inducement to transact at artificial prices.”

What Investors Should Know

• Spoofing isn't just technical- it's personal. Retail investors must recognize red flags like:
• Sudden large orders disappearing
• Unusual bid-ask movement without news
• Flash price spikes
• Don’t trust apparent “buying pressure” or “volume surges” unless backed by credible news or filings.
• Platforms must improve investor education, especially around algorithmic risks.

Conclusion: Civil Action Today, Criminal Tomorrow?

Spoofing is prosecuted under civil law in India for now but its market consequences are no less than a criminal scam. The increasing use of Regulations 3 & 4 of PFUTP, Section 11B, and interim impounding orders suggests SEBI is pushing the envelope within its powers.

The need of the hour is for:

• Clear statutory definition of spoofing and layering
• Criminal penalties for egregious cases
• Stronger investor surveillance literacy

Till then, SEBI’s civil enforcement as shown in the Nimi and Patel orders  remains the frontline defence against the invisible scam threatening small investors.

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