Informist, Monday, Jul. 7, 2025

By Rajesh Gajra

NEW DELHI - The interim order by the Securities and Exchange Board of India against investment and trading firm Jane Street is nothing short of a major investigative triumph for the market regulator. Of course, investors want to see more of this and across the spectrum of the market ecosystem because what Jane Street has done strikes at the very integrity of the market, which is what SEBI is supposed to protect. The interim order could not have come a day too soon.

The unprecedented disgorgement of unlawful gains of INR 48.44 billion ordered against the four Jane Street group entities, two of which are SEBI-registered foreign portfolio investors, for manipulative trading in index options, index futures, and underlying index stocks in the cash market, is possibly the highest ever. But SEBI's order is an interim one and is subject to final findings from the ongoing investigation which will be substantially larger in scope.

The crux of SEBI's case so far is that the Nifty Bank index was allegedly manipulated by Jane Street group entities on at least 18 index option expiry days and the Nifty 50 index was manipulated on at least three expiry days, between January 2023 and March this year. In the next phase of investigation, SEBI will look at more expiry days and whether more indices, including the BSE Sensex, were also manipulated.

Index manipulation is a serious matter. It hits investors and participants real hard. When SEBI had released its research report on index derivatives trades for 2022-23 (Apr-Mar) and FY24, which showed over 90% of retail investors had lost money, the whole blame was put on the recklessness, greed, or immaturity of these investors.

But, as the interim order now notes, the prima facie manipulation by foreign portfolio investors has inflicted "deep damage" to the equity market and retail traders. It has given "additional context" to SEBI's earlier research reports about retail options traders making losses, SEBI said in the interim order.

The chronology of events suggests SEBI knew beforehand that retail investor losses were partially or perhaps substantially due to the scale of trading volume and use of proprietary trading strategy of Jane Street group entities, including potential index manipulation. The market regulator began looking at Jane Street's trades in April 2024 when the US firm's proprietary strategy in options trading in the Indian market came out in the open during the hearings of a lawsuit filed by the firm in the US against two former dealers.

On Jul. 23, SEBI asked the NSE to examine the trades of Jane Street. On Jul. 31, SEBI issued a consultation paper laying out measures to strengthen the equity index derivatives framework for market stability and increased investor protection. SEBI issued a circular on Oct. 1 confirming most of the proposed changes from the consultation paper. The most important change of restricting weekly index options to just one broad-based index per exchange was the first to get implemented--from November 20.

This means SEBI was aware that retail traders' losses in equity derivatives in FY23 and FY24 were due to such manipulation by a large investor. No one else knew then that retail investors were victims of market manipulation and that SEBI's restrictions on derivatives trading, while driven by its core objective, were an ad interim measure because Jane Street investigation was in the early stages at that time. Had equity derivatives investors been told about this, it would have sent an adverse message to them--that the market regulator could not stop index manipulation which had caused them substantial trading losses.

That a large FPI entity such as Jane Street could allegedly carry out huge trades in derivatives and cash markets simultaneously in a manipulative manner is nothing short of a massive failure of regulation. Retail traders, who were trying to profit from options trading, had been complaining on social media about the sudden spikes in premiums and cash market prices since more than a year. One of them, Mayank Bansal, an experienced investor, had directly approached SEBI and made a presentation to some officials on palpable signs of possible manipulation in index options trading on expiry days due to an unnatural rise in implied option volatilities through the expiry day.

Jane Street group entities were allegedly manipulating the Bank Nifty and its underlying stocks the most. Bank Nifty is a banking sector index with just 12 companies in it. Any unlawfully profiteering trader will find it less onerous to target 12 stocks of this index and not a larger lot of 50 stocks in the Nifty 50. So, SEBI was indeed justified in restricting weekly expiry on index options to an index which is broad-based and not sectoral or thematic.

But given the Jane Street affair, SEBI must now reconsider its order limiting weekly options to only one broad-based index. It should allow such options on other broad-based indices such as the Nifty 100, the BSE 100, the Nifty 200, the BSE 200, the Nifty 500, and the BSE 500. SEBI has openly said it wants to nudge retail investors to medium and long-term futures and options contracts. But it must not use force to achieve this objective. Instead, it should hold extensive public meetings and educate derivatives traders but not push them to something else without even interacting with them.

Making profits from derivatives trading through high frequency trading and co-location access are legitimate. The stock exchanges encourage these so that they earn higher revenues from higher volume. SEBI also allows such derivatives trading.

The regulator acknowledges that it and stock exchanges must have the strongest monitoring of the access to such technologies. But with regard to expensive algorithms-based strategies available to large institutional or corporate players, SEBI just says every user of an algorithm is responsible for the output of the algorithm. This is not enough. SEBI and exchanges must run random algorithmic strategies submitted by brokers and clients to stock exchanges as required under the rules in a simulated environment and see the results for themselves.

Retail investors have a right to a level playing field. Small investors cannot be simply told to accept that large investors and traders who have the money will get ultra-quick access to tick-by-tick data by paying huge co-location charges to stock exchanges. Even if retail investors cannot match the resources of large trading firms and buy data that is available faster, they have a right to unmanipulated prices of indices and stocks. While a truly level-playing field may be difficult to achieve, this is not a mere theoretical construct. While perfect information symmetry may not be possible, the least SEBI can do is to prevent widening of the asymmetry in the market, that too merely on the basis of the ability to pay.

This investigation has not been an easy task for SEBI. Just unravelling Jane Street's alleged manipulative trades must have been extremely hard and time consuming. But SEBI also has vast resources at its disposal, including staff and information technology. Surely, it can do better.

In rare cases, such as the Jane Street one, the market regulator must also be able to disclose publicly that an entity is under a preliminary investigation without naming it. It can also issue a temporary suspension to that entity without a formal order. If the current regulations do not permit such flexibility, then the regulator must tweak the regulations to provide for it, if necessary by lobbying the government for this change. Speed is of essence when you are the regulator of a fast-paced and large market such as equity derivatives. After all, justice delayed is justice denied. End

Edited by Vandana Hingorani

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