In late December 2024, portfolio manager Mayank Bansal,witnessed abnormalities in the options volumes of Nifty, smelled a rat and alerted market regulator, Securities & Exchange Board of India (SEBI), that a top U.S.-based proprietary firm was into foul play. The SEBI investigated the matter and passed a suo motu interim order on Thursday banning the errant trading firm and impounding ₹4,843 crore of unlawful gains. In an interview with The Hindu, Mr. Bansal, among the largest portfolio manages in the options space in Indian equities, explains what he saw and talks about what needs to be done to deter such manipulators. Edited excerpts:
When did you realise/suspect Jane Street was gaming the system?
The market getting manipulated was clear by February 2024 itself. The identity of the manipulator was not clear by then but the options market dynamics, when viewed by any seasoned options trader, made it evident that the market was getting manipulated.
The needle of suspicion was always on Jane Street due to the disproportionate profit it was accumulating. There was also a widely-publicised court case in the U.S. between Jane Street and Millenium where Jane had sued two of its traders who had left to join Millenium for having taken a highly-valuable secret strategy with them. It was inadvertently revealed during the court proceedings that the strategy pertained to Indian options and that Jane Street had made ₹8,000 crore from it in calendar year 2023.
What was the anomaly?
The anomaly was that the manipulator would take heavy options positions in the derivatives market on options expiry days, which is very deep and then move the underlying cash segment (which is far less liquid) to benefit from those.
This was done via 2 constructs of expiries that Jane Street created:
Case 1-Quiet expiry: Here the manipulator would sell at the money options in bulk leading to them becoming dirt cheap as indicated by their implied volatilities. It would then maintain the index in a very tight range to pocket all the premium. Interestingly, the expiry too would be right on the strike where it had sold its options.
Case 2-Volatile expiry: Here, it would buy a lot of options on one side (say calls for profiting massively on the upside). It would buy in bulk. The options would become exorbitantly expensive with no rationale (imagine a bottle of water selling for ₹1 lakh) and then in the latter hours of the day, it would execute a steep upmove in the cash market to profit heavily from all the calls it had bought.
The extent of cheapness of options (in case 1) or expensiveness of options (in case 2) would be absolutely inexplicably bizzare. Imagine a real estate property selling for ₹100 in case 1 and a bottle of water selling for ₹1 lakh in case 2.
What did you do then?
In early 2024, when most experienced traders had identified the manipulation, they were largely just waiting for the regulator to step in and the manipulation to correct, but the extent of manipulation just kept increasing right through 2024, all the way upto December, at which point the Nifty was being made to move 2% casually. It is at this point (in late December) that I made the presentation and mailed it to SEBI.
Mr. Ananth Narayan (SEBI Wholetime Member who has passed the interim order on Jane Street) was kind enough to immediately respond on it and ask me for an in-person presentation at SEBI Bhawan, BKC in Mumbai. Since then, I have been in touch with SEBI and have been sending emails whenever I have noticed continued anomalies.
Now that SEBI has passed the interim order, are you satisfied?
SEBI’s interim order is just that as of now, an interim order. The unlawful gain of ₹4,843 crore that they have mentioned is from their in depth analysis of just 21 expiry days. They are yet to evaluate all the other expiry days. This unlawful gain is most likely a small fraction of the entire unlawful gains which would be revealed over time.
In all likelihood, almost the entirely of ₹36,500 crore would be unlawfully got. This is because Jane Street, which typically serves as a market maker in other geographies was, in fact, not market making in India at all, but was instead taking large directional exposures via options, which is highly odd. In doing so (something which is not its forte), it was making 9x of the next largest guy (Optiver) in India in terms of profits.
Also impounding just the unlawfully gotten gains does not alone serve as justice. The penalty should ideally be much higher. Imagine travelling ticketless in a train and the fine on being caught being just the price of the ticket.
How significant is the action against the American firm?
Having said this, the judgment by SEBI is an absolutely landmark judgement. There is no question about that. India has taken a stand and this judgment will have reverberations across trading desks in Hong Kong Singapore, London and New York. It’s a wake up call for anyone targeting Indian markets as soft targets.
SEBI has not confined itself to fining small inconsequential amounts like ₹50 lakh or ₹ 1 crore. And made a stark departure from some of its earlier mellow judgements.
What harm Jane Street has done to Indian capital markets and retail investors?
Jane Street has completely eroded confidence in the sanctity of Indian markets. India’s premier indices were held hostage to the whims of one single unscrupulous player. This continued for 2 years. It is fairly humiliating and embarrassing for us as a country.
The bulk of the losses were borne by the retail segment. It was revealed in a recently published SEBI report that of the 3 key segments (FPIs, prop desks (institutions), retail), only the retail segment was incurring heavy losses. These losses were to the tune of ₹55,000 crore in FY2024. This is roughly the entire pool of profits in the Indian derivatives segment.
It has also been revealed that Jane Street made ₹20,000-₹25,000 crore in the same period. This is 40% of the entire pool of profits in Indian deviates. And almost all of it illegally amassed via manipulation, largely funded by Indian retail investors.
What more should be done to get Jane Street to justice and create a deterrent for other such market manipulators?
SEBI should pass an exemplary judgement to deter future manipulators who try to do something similar. Only last week, a new manipulator seems to have entered the fray at a smaller scale. To put a conclusive end to this, SEBI should ideally have limits on the exposure entities take (even if high). Or send a soft message across that high exposures would be investigated.
This messaging and the consequent surveillance around this should be iron clad. Entities with disproportionate profits need to be routinely investigated to keep Indian markers free of such scourge.
SEBI had in February 2024 floated a consultation paper proposing net and gross intraday and overnight delta exposure limits. This was refuted by a body called the FIA- an obscure body representing the very interests of firms like Jane Street. Sebi initially disregarded that representation but ultimately conceded.