SEBI Rules on Spoofing will Support Retail Investors
Spoofing is the practice of placing bulk orders and then cancelling them before they are executed. It is algorithmic trading that is capable of manipulating prices by creating an illusion of demand or supply. As traders are prompted to react due to such changes, it can cause the prices to shift sharply.
Order to Trade Ratio (OTR)
The ratio of an order's cumulative number of submissions, modifications, and cancellations to the number of trades it generates on the exchange is calculated as OTR.
What is OTR Framework?
The OTR framework was created to prevent traders from manipulating the order book by placing large (fake) orders without executing them. Furthermore, the accumulation of orders places a burden on the exchange infrastructure. Concerns over order flooding and lack of opportunity to genuine traders were addressed.
Circular on March 26, 2021
The regulatory agency, in partnership with the exchanges, had floated the new circular with respect to the surveillance measures in order to curb the Noise or to identify the Noise creator in the exchange. According to the circular, the surveillance measure will be applied to everyday trading operations at the Client / Proprietary account based on three main criteria.
- A high Order to Trade Ratio (OTR) in value term
- Order Modifications in Large Numbers/Instances
- A high percentage of orders are modified, resulting in a deferred/lower order execution priority.
The action for these will be as below:
- Trading will be suspended on the Stock and Equity Derivatives segments for the first 15 minutes of trading at the PAN level around the Exchanges for such a Customer/Proprietary Account.
- Any additional instance of persistent violation by a Client proprietary account (say N times) will result in trading disablement for a period of 'N' instances X 15 minutes on a rolling 20 trading day basis, subject to a Maximum disablement of 2 hours.
The benefit to the Retailers
As a retail trader who truly wishes to profit from the market, you can sometimes be influenced by large players who have an edge over retail traders.
Since retail traders do not deal in large quantities or change their orders as often as institutions, this step will favour them and provide the market with the correct demand and supply direction. A 50 order-to-trade ratio is very high and can cover most genuine cases. It would mainly influence those who put orders with the intent of generating false demand/supply.
These will be effective from April 5, 2021, and the first action will be taken on May 5, 2021, based on the rolling 20-day trading window.