What is Spoofing in Trading? Explained

Every second, thousands of orders appear and vanish across global exchanges but not all are genuine. Some are placed with no intention of being executed, designed purely to trick the system and other traders.This practice, known as spoofing, can distort how other traders view the market. In this blog, we break down what is spoofing in trading, how it influences market activity, and the reasons it’s strictly prohibited by regulators worldwide.

What is Spoofing in Trading? 

Spoofing is an illegal trading practice where a person places large orders to buy or sell a stock, cryptocurrency, or other asset with no intention of actually letting the order complete. The goal is to create a false impression of high demand or supply. This tricks other market participants into making decisions based on misleading information. By creating this fake interest, the spoofer can influence the asset’s price, allowing them to buy low or sell high for a profit. Once they get the price they want, they quickly cancel their large, fake orders.

How Spoofing Works 

Spoofing is a multi-step process used to trick other traders. The goal is to create an artificial price movement that the spoofer can profit from. This process is often carried out using high-frequency trading algorithms that can place and cancel orders very quickly. The typical steps include:

• Placing large ‘spoof’ orders: A trader places one or more large buy or sell orders that they do not intend to execute. These orders are visible to other traders in the market’s order book.
• Creating false sentiment: Other traders see these large orders and react. For example, a very large fake buy order might suggest strong demand, encouraging others to start buying, which pushes the asset’s price higher.
• Placing real trades: As the price moves in the spoofer’s desired direction (higher, in this example), the spoofer executes their actual, often smaller, trade on the opposite side. For instance, they sell their own shares at the new, higher price they just helped create.
• Canceling the ‘spoof’ orders: Before the large, fake orders can be filled, the spoofer cancels them. The false demand or supply vanishes instantly, often causing the price to reverse. By this time, the spoofer has already completed their real trade at a profit.

Legal Implications of Spoofing 

The legal framework and regulations governing spoofing in the Indian stock market include:

• The primary regulatory body addressing spoofing in India is the Securities and Exchange Board of India (SEBI), which governs market conduct under the SEBI Act, 1992, and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP Regulations).
• While spoofing is not explicitly defined in Indian law, SEBI treats it as a fraudulent and unfair trade practice under the general provisions of Section 12A and Regulation 4 of the PFUTP Regulations.
• SEBI has explicitly made excessive order modifications and cancellations punishable since April 2021 through circulars that set rules imposing penalties on repeated spoofing violations.
• SEBI’s enforcement actions for spoofing include temporary suspension of trading accounts (ranging from 15 minutes up to 2 hours or more), monetary penalties, prohibition from securities market activities for up to 2 years, and disgorgement of illegal gains.
• Under Section 15HA of the SEBI Act, penalties can amount to Rs 25 crore or three times the profits made by deceptive activities, whichever is higher.
• Spoofing violates principles of fair trading, distorts price discovery, and harms market integrity, prompting SEBI to use a combination of preventive rules and punitive measures.
• In severe cases, besides SEBI action, criminal proceedings can be recommended, and courts may impose further sanctions for deliberate market manipulation.
• SEBI mandates transparency on order disclosures and stringent monitoring of high-frequency trading patterns to detect and penalise spoofing activities effectively.

Real-World Examples of Spoofing 

India’s regulatory history now includes notable cases highlighting SEBI’s crackdown on spoofing:

1. Patel Wealth Advisors Pvt Ltd Case (2025)

This is India’s landmark large-scale spoofing case where SEBI found the firm executed 621 spoofing instances on 173 stocks over 292 trading days. SEBI imposed a trading ban on PWAPL and its directors, ordered disgorgement of ₹3.22 crore illegal gains, and highlighted the distortion caused to the market’s price discovery process. This case involved spoofing across cash and derivatives markets for several years, the largest of its kind in India.

2. Jane Street Group Case (2023-2025)  

Another significant case involves the Jane Street Group, where SEBI identified manipulative trading patterns between January 2023 and March 2025. The firm allegedly engaged in spoofing and market manipulation on 21 separate derivative expiry days, distorting index levels to benefit their large options positions. SEBI imposed one of the largest penalties of about ₹4,843.58 crore for unlawful gains and imposed interim restrictions barring the group from accessing securities markets. This case displays sophisticated spoofing strategies impacting index options and derivatives markets in India.

Detecting and Preventing Spoofing 

Market regulators and exchanges actively monitor for this illegal activity. They use several methods to detect and prevent spoofing, such as:  

• Advanced surveillance: Exchanges use powerful computer systems to watch trading activity in real time. This software is designed to spot unusual patterns.  
• Monitoring order-to-trade ratios: Regulators look for traders or firms that place a very high number of orders (especially large ones) but cancel most of them before they are executed. A high ratio of cancelled orders to completed trades is a major red flag.  
• Pattern recognition: Algorithms are used to identify suspicious trading techniques, such as “layering,” where a spoofer places multiple fake orders at different price levels to create a more convincing illusion.  
• Strict penalties: To discourage spoofing, regulators impose heavy penalties. These can include very large fines, suspension from trading, and in some cases, criminal charges.  
• Analysis of data: After the market closes, officials can analyse trade data to find evidence of manipulative patterns that their real-time systems might have missed.

Consequences for Traders Involved in Spoofing 

Traders involved in spoofing activities face stringent regulatory consequences as follows:

1. SEBI considers spoofing a manipulative, deceptive, and fraudulent market practice punishable under the SEBI Act, 1992 and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003.
2. Regulatory measures include temporary suspension or disablement of trading accounts ranging from 15 minutes to 2 hours for repeated offenses detected during daily trading activities.
3. Monetary penalties can be levied on individuals and entities, with fines ranging from a few lakh rupees to crores, depending on the severity, frequency, and magnitude of spoofing activities.
4. SEBI has imposed bans on trading and prohibited market participation for periods up to 2 years or more on companies and individuals found guilty of spoofing to prevent further market abuse.
5. Disgorgement orders are issued to recover illegal gains made through manipulative practices, with penalties sometimes reaching three times the profits earned from spoofing.
6. Severe cases may lead to revocation or suspension of registration, freezing of assets, and potential criminal proceedings.
7. SEBI continuously monitors order-to-trade ratios, excessive order cancellations, and order modifications to detect spoofing and enforce penalties proactively.

Conclusion

Beyond just knowing what is spoofing in trading, it’s important to learn about its real impact. It is an attack on market fairness that erodes trust. The strong enforcement and surveillance in place are not just to punish rule-breakers; they are essential actions to protect the market’s integrity and ensure it remains a reliable, transparent place for all participants.

FAQ‘s