SEBI Bans Jane Street: What It Means For Indian Markets
The Indian markets witnessed a significant regulatory intervention as SEBI barred global high-frequency trading powerhouse Jane Street from Indian markets and impounded nearly INR 4,840 crore (~$570 million) in alleged illicit gains1. This is the highest disgorgement amount ever directed by the stock exchange regulator in India.
The Jane Street ban comes against the backdrop of multiple warnings issued to the trading house in the past, but the US-based firm continued with aggressive algorithmic strategies that allegedly skewed the Nifty and Bank Nifty derivatives landscape.
Jane Street’s exit from the Indian markets reaffirms the commitment of the regulators towards market integrity. This is also good news for the country's derivatives ecosystem, and the step should improve retail investors’ confidence in the market.
SEBI Bans Jane Street: What Happened And Why
SEBI had earlier issued multiple warnings to Jane Street, one of the world’s largest proprietary trading firms, about market manipulation concerns. There was evidence to suggest that the firm used its substantial size to place trades not just for profit, but to manipulate prices in its favor. As a foreign proprietary desk with advanced algorithms, Jane Street’s dominance in low-liquidity moments raised fairness concerns.
This is why, on July 3rd, SEBI issued a landmark order banning Jane Street Capital from participating in India’s stock and derivatives market. The order followed a detailed investigation into unusual trading patterns observed in the Nifty 50 and Bank Nifty options segment, particularly around expiry days.
SEBI has alleged that Jane Street used high-frequency, algorithm-driven strategies that created artificial volatility and potentially distorted prices to its advantage. The total disgorgement amount alleged by SEBI is INR 4840 crore, as Jane Street’s trades were not in sync with genuine hedging or market-making but aimed at market and price manipulation. This hurt retail and other institutional market participants.2
Also Read: Navigating market volatility
Expiry Day Volatility And SEBI’s Regulatory Concerns
Large trading firms, such as Jane Street, have a serious ethical responsibility to maintain market integrity. However, as per SEBI’s allegations, Jane Street behaved in a completely contrary manner, especially while trading on the most volatile days (around the expiry of index and stock derivatives). On these days, traders square off positions, roll over contracts, and jockey for favorable settlement prices, often triggering sharp intraday swings.
This started with SEBI’s assessment of an irregular increase in expiry date volatility in the past few months. The regulator observed a sudden surge in prices and open interest, particularly in at-the-money (ATM) and far out-of-the-money options. The swings typically occurred in the last 30-45 minutes of trading, affecting retail and institutional investors who were exposed to unexpected losses.
With huge capital availability and sophisticated advanced algorithm technology, Jane Street allegedly engaged in price manipulation actions, including large, rapid trades that pushed index levels toward certain strike prices.
Also Read: Unlocking Liquidity In Alternative Investments
Impact On Indian Markets And Domestic Prop Traders?
The announcement triggered several immediate reactions across Indian markets and the trading community in India after the announcement of SEBI’s ban on Jane Street. First, there was a significant reduction in trade volumes, especially on the day when the announcement was made.
On the day of SEBI’s interim order, index options volumes fell around 17% on NSE and 13% on BSE, reflecting the sudden withdrawal of Jane Street’s aggressive trading strategies3 .
Four stocks suffered collateral damage as over INR 12,000 crore in market capitalisation was wiped out from their valuation since the announcement was made (Angel One, BSE, CDSL, and Nuvama Wealth dropped between 3.5% and 11%, highlighting concerns over the impact on transaction-fee revenue)4. Retail losses in FY 2024-25 were reported at INR 1.06 trillion, representing a 41% increase from the previous year5.
However, from the perspective of market integrity, domestic prop traders welcomed the decision, as SEBI’s move to address the issue can significantly improve market conditions. The conditions of the markets will improve with wider bid-ask spreads and calmer expiry sessions while avoiding past volatility patterns.
Overall, the signals have been mixed. The exit of Jane Street will be beneficial for the market’s long-term integrity, as opined by various experts and traders. However, the immediate reaction is more uncertain, with a liquidity outlook, as there is a chance for F&O volumes to remain subdued until alternative liquidity sources emerge.
Conclusion
SEBI’s action could be termed as nothing short of unprecedented. The decision once again underscores the regulator's role in the derivatives market and upholds the integrity and stability of India’s rapidly growing markets. As far as the immediate reactions are concerned, there might be a little bit of reduction in excessive expiry?day volatility. At the same time, it also highlights the delicate balance between fostering liquidity and preventing manipulation.
For investors, the entire episode serves as a reminder of the inherent challenges and risks associated with derivatives trading. A more prudent approach for any investor is to diversify the portfolio by including fixed income options, such as corporate bonds and Securitised Debt Instruments (SDIs), to achieve a more balanced risk-return profile, especially in unpredictable market conditions.
It is essential to explore alternatives beyond equity to manage risk patterns and achieve portfolio objectives, particularly for retail investors with fixed life goals in mind.
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FAQs On Jane Street Ban
1. What did Jane Street do?
Jane Street allegedly manipulated expiry-day index prices in India to make unfair profits. SEBI claims it distorted market settlement for gain.
2. Who is Jane Street's CEO?
Jane Street does not have a CEO and is managed by a group of senior partners. The firm operates with a flat leadership structure.
3. Is Jane Street regulated?
Yes, Jane Street is regulated through subsidiaries under the SEC, FINRA, FCA, and other global regulators. Its operations comply with local laws in each market, such as SEBI in India.
References:
1. The Times Of India, accessed from: https://timesofindia.indiatimes.com/business/india-business/sebi-bans-jane-street-says-disgorge-rs-4-8k-crore/articleshow/122258460.cms
2. Business Standard, accessed from: https://www.business-standard.com/markets/news/sebi-cracks-down-on-jane-street-halts-india-trading-over-manipulation-125070700659_1.html
3. Business Standard, accessed from: https://www.business-standard.com/markets/news/sebi-cracks-down-on-jane-street-halts-india-trading-over-manipulation-125070700659_1.html
4. The Economic Times, accessed from: https://economictimes.indiatimes.com/markets/stocks/news/jane-street-aftermath-4-stocks-suffer-rs-12000-crore-wipeout-in-collateral-damage/articleshow/122276177.cms?from=mdr
5. Reuters, accessed from: https://tinyurl.com/yre8kra8
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