Rightfully declaring that, “the
integrity of the market and the faith of millions of small investors and
traders, can no longer be held hostage to the machinations of such an
untrustworthy actor”, SEBI, under its interim order, also impounded $ 567 million
(Rs 4843 crore) as alleged unlawful gain from New York-based Jane Street.
First things first: Jane Street
operates in the Indian market through four group entities, of which two are
based in India, while the other two are based in Hong Kong and Singapore. These
two Asian units operated as investors registered with India. The interim order
of the SEBI states that between January 2023 and March 2025, the four entities
cumulatively made a profit of $5 billion by trading in equity options in
India.
Incidentally, the scale of
operations of Jane Street came to light in 2024 when the firm sued a rival
hedge fund, Millennium Management, accusing it of stealing its valuable
in-house trading strategy. The court
proceedings revealed that this strategy was employed by Jane Street’s option
trading in India, which generated $ 1 billion in profits for it in 2023. It is, of course, a different matter that
the case was eventually settled between the firms, but the terms of settlement
were not disclosed. Intriguingly, much of the detail about the actual trading
mechanics and proprietary methodology of Jane Street that gave a profit of $ 1
billion remained confidential within the court filings.
Nevertheless, the investigation
carried out by SEBI did reveal Jane Street’s overall trading conduct and profit
mechanics in India. As a group, Jane Street first aggressively bought
significant quantities of banking stocks and futures in the morning trading
session, temporarily pushing up the Bank Nifty index and simultaneously
suppressing its put option prices. Then, it built large short positions –
primarily put – in bank index options. These option positions were unusually
larger than their stock and futures positions, which is not a genuine
market-neutral index arbitrage. Later, shortly before the closure of the
market, it aggressively sold large quantities of the same banking stocks and
futures to exert downward pressure on the Bank Nifty index.
This “marking the close” strategy
caused the Bank Nifty index to decline, making Jane Street’s previously
acquired put options significantly more valuable. As put options are
cash-settled at expiry, Jane Street’s profits were realized as the closing
price was sharply lower than their put strike prices. And, the profits from
these options vastly outweighed any losses sustained from selling the stocks at
lower prices than bought them for in the morning. Interestingly, Jane Street
managed to “work around” Indian regulations that prohibit foreign portfolio
investors from undertaking intraday positions in the cash market by carrying
out its day trading through its Indian-incorporated entities, such as JSI
Investments Private Limited. SEBI noted
that Jane Street repeated this coordinated pattern of trading mechanism,
especially on expiry days of options—a critical input for options settlement –
and reaped huge profits. This ‘manipulative strategy’ continued uninterrupted
till SEBI banned their operations in the Indian market.
Now the question is: How could
Jane Street carry on with its market manipulation for this long? The answer is: Slow regulatory response and
inadequate surveillance mechanisms. Despite recurring large-scale trading patterns,
particularly across multiple expiry cycles, regulators failed to flag these as
potential red flags. There was also a
lack of effective inter-agency coordination: NSE closed its internal probe,
accepting Jane Street’s formal assurances of compliance, even though patterns
of aggressive “marking the close” trades were evident. Even SEBI relied on these formal statements
rather than adopting a proactive regulatory stance until as late as 2025.
Structural flaws in the market, such as: lack of well-defined market share
thresholds that would automatically trigger regulatory audit, reliance on
end-of-day weighted average pricing for options settlement, and skewed and
ill-liquid index composition created systemic vulnerabilities. Cumulatively,
they allowed Jane Street to operate its manipulative trading unchecked for far
too long and reap huge profits at the cost of gullible retail investors.
That aside, SEBI has recently
permitted Jane Street to resume trading in Indian stock markets after the firm
deposited $567 million in an escrow account. Both NSE and BSE were, of course,
asked to maintain close surveillance of its activities. At the same time, Jane
Street, while asserting that their actions are within the legal framework,
stated that they have deposited the amount “without prejudice to their rights
and remedies which remain available to them in law and equity”. That being the undertone of Jane Street, one
has to wait for the final order of SEBI to know the future trajectory of
India’s derivatives market.
**
