Jane Street has been barred from the Indian securities market by the Securities and Exchange Board of India (Sebi), which has said the US firm used its trading strategies to "manipulate" a key stock market index, leading to losses for millions of retail investors, allegations Jane Street has rejected.
Jane Street has been sounding out Indian law firms for its upcoming battle with Sebi but has yet to hire one, four sources with knowledge of the matter said to Reuters. It has told staff it will contest a ban.
Former Sebi chairperson Madhabi Puri Buch on June 8 said the capital markets regulator was seized of the Jane Street matter since April 2024, and termed attempts to imply regulatory failure as "unfortunate".
Sebi in its interim order said Jane Street accumulated large volumes of constituent stocks of the Bank Nifty index, which comprises the 12 top Indian bank stocks, in the cash and futures markets, thus pushing up the index prices.
The Sebi order said that during the second half of most days in which Jane Street's positions were studied, the US firm reversed the first leg of its trade, selling the constituents in the cash and futures markets, thereby pushing down the price of the index and its constituents.
Jane Street also took short positions in the derivatives segment by buying cheap "put" options and selling expensive "call" options linked to the Bank Nifty, the regulator said.
This led to a rise in value for the "put" options and a drop in value for "call" options, earning Jane Street large profits, which outweighed any losses that were incurred during the first leg of the trade.
Sebi said this trading pattern created "a false or misleading appearance of market activity" and attracted "unsuspecting" investors to trade at levels that were "artificial and temporary".
Jane Street, in an internal email to its employees, said the activities in question were what is known as an "arbitrage trade", a common practice by large trading firms in financial markets.
In an arbitrage trade, firms buy and sell the same asset in different markets and pocket the profits from the difference in prices.
Arbitrage trading is legal in India.
In its internal memo, Jane Street argued there was a large gap between the price of the Bank Nifty index in the options markets and the price implied by the level at which the stocks were trading. This divergence, it said, was observed and Jane Street traded in a direction consistent with closing that gap.
Proprietary trading giants such as Jane Street have made hefty profits from India's derivatives market, which accounts for roughly 61 per cent of equity options contracts that are currently traded worldwide, according to data from the Futures Industry Association.
In the 12 months to March 2024, proprietary traders and foreign investors made gross profits of 330 billion rupees and 280 billion rupees, respectively, a Sebi study in September 2024 showed.
During that same period, retail traders lost 524 billion rupees.
On July 7, leader of the Opposition Rahul Gandhi accused Sebi of “staying silent” and Prime Minister Narendra Modi’s government of “sitting with its eyes closed” in the case of the trading firm Jane Street.
“I clearly stated in 2024 - the F&O market has become a playground for 'big players,' and small investors' pockets are continuously being drained,” Rahul wrote in Hindi on X.
“Now SEBI itself is admitting that Jane Street manipulated thousands of crores. Why did SEBI remain silent for so long? At whose behest was the Modi government sitting with its eyes closed? And how many more big sharks are still shorting retail investors?
“In every case, it’s clear - the Modi government is making the rich richer and pushing ordinary investors to the brink of ruin,” he added.
On Monday, Sebi said retail investor losses on derivative trades widened by 41 per cent to 1.06 trillion rupees in the subsequent year. It did not blame proprietary traders for the widening losses of retail investors and nor did it provide fresh data on gains made by proprietary traders.
Sebi has seized $567 million of Jane Street's funds, equivalent to the amount of what it calls "unlawful gains".
The US firm can deposit that amount and regain access to the Indian markets. It also has 21 days to file its reply or any objections to the order, and can also challenge the order judicially via the Securities Appellate Tribunal.
Sebi is working on a final order and also expanding its investigation into Jane Street's trade on indexes other than the Bank Nifty.
