The Securities and Exchange Board of India has taken a drastic step that has shook India’s markets. It banned global trading giant Jane Street Group’s participation in India’s stock markets.
It accused the company of orchestrating one of the most bold market manipulation schemes ever seen in Indian history.
This is a alleged strategy
Jane Street, an American quant trading firm known for their high-frequency strategy prowess, is alleged to have leveraged India’s volatile derivatives markets, particularly around the expiry dates.
SEBI investigated the Nifty bank index, which is a measure of the top Indian banking stocks.
Jane Street, a financial firm in London, reportedly used the markets like a chessboard on weekly and monthly settlement days for derivatives worth billions of rupees.
The firm bought large amounts of Nifty Bank futures and stocks in the morning to artificially boost the index.
Jane Street quietly built up massive positions on the bearish side in the option segment by buying puts and selling call options.
As contracts approached settlement in the afternoon, traders would unload the stocks and futures they had purchased earlier, driving the index down and securing large gains on their option trades.
The index was manipulated to create a false spike and crash, which fooled the traders into believing that real trading drove the market.
Jane Street, meanwhile, made huge profits on options which benefited from this sudden change.
Sleight-of-hand with high frequency
It didn’t end there. SEBI claims Jane Street engaged in “mirror trades,” matching up buy and sell orders within its own entity to give the appearance of active trading.
They were usually reversed in seconds and generated volume without actual risk.
Circular trading was evident, in which trades were bounced between groups to increase volume and affect prices. This occurred especially during the last minutes of expiration.
These tactics did not provide any liquidity, nor were they a risk hedge. SEBI claims that the tactics were solely about manipulating settlement prices and profits from manipulated option positions.
Jane Street earned over Rs 43,200 crores in option profits, but suffered losses of over Rs 7,200 billions in futures and cash, resulting in a gain net of Rs 36 500 crores over the 21 days that SEBI examined.
SEBI is tough on the crime
SEBI did not hold back this time. Jane Street and its affiliated firms were banned from trading activities, whether they are done directly or indirectly.
The investigation also frozen Rs 4,843 billion in suspected illicit gains. These have been transferred to an escrow fund while the investigation is ongoing.
This crackdown is one of SEBI’s most aggressive enforcement measures to date, and sends a clear message regarding the dangers of manipulating markets.
Jane Street refutes the accusations. Jane Street claims that its strategies are compliant with Indian regulations and it is committed to working with them.
The company also claims that its actions are not manipulative, but rather part of normal trading activity.
India markets need a wake-up call
Already, the fallout can be seen.
Nifty Bank Weekly Options, once one of the most popular options contracts, have now been discontinued. SEBI is also taking steps to strengthen rules in order to protect investors at retail and to crackdown on algorithmic abuses.
The case may become an important landmark not only for SEBI, but also for financial regulations around the world. It is a good example of what can happen when cleverness turns into crime, especially if market signals are manipulated at a large scale.
As new information becomes available, this post may change.
