Jane Street Group LLC, one of the world’s most influential proprietary trading firms, is expected to argue that its controversial options trades in India were driven by outsized demand from retail investors rather than any intent to manipulate the market, a defence that could determine how India balances innovation with investor protection in its booming derivatives market.
This defence comes as the Securities and Exchange Board of India (SEBI) investigates the firm’s January 2024 trading activities, which reportedly generated its most profitable day across two years under regulatory scrutiny.
On July 4, SEBI issued an interim order accusing Jane Street of taking market-moving positions that influenced the National Stock Exchange’s (NSE) Bank Nifty Index in ways that benefited its bearish options bets.
While SEBI initially barred the New York-based firm from trading, that ban was lifted after Jane Street deposited Rs 48.4 crore ($560 million) in alleged unlawful gains into an escrow account. The firm has since requested an extension to respond formally to SEBI’s preliminary findings.
SEBI’s Allegations: Manipulation Through Options and Underlying Stocks
In its 105-page interim order, SEBI devoted considerable focus to Jane Street’s trading on January 17, 2024, a day when the NSE Bank Nifty Index plummeted 3.2% at market open and fell further through the session.
According to SEBI, Jane Street aggressively bought up index constituents in both the cash and futures markets during the morning hours. The regulator alleges that these moves temporarily propped up the index, after which the firm unwound those positions in the afternoon, allowing it to profit handsomely from its previously established bearish options exposure.
SEBI claims Jane Street’s purchases accounted for 16% to 25% of the turnover in 10 of the 12 Bank Nifty constituent stocks, making it the largest net buyer. It also noted that the firm’s bearish options exposure, a combination of sold calls and bought puts, was 7.3 times the size of its long equity exposure.
Jane Street’s Side : Retail-Driven Demand and Partial Hedging
Jane Street, known for its quantitative strategies and global arbitrage operations, is likely to counter SEBI’s claims by citing massive retail participation in options on the Bank Nifty index.
People familiar with the matter told Bloomberg that the firm will argue it was fulfilling its role as a market maker by responding to more than $4 billion worth of individual investor options trades, of which Jane Street claims it facilitated around $1 billion.
These numbers are calculated based on net delta positions, which translate options exposure into equivalent equity values by measuring sensitivity to underlying price movements.
The firm is also expected to highlight that only about 10% of the demand could realistically be hedged in the cash market, a practice known as partial hedging, commonly adopted by global market makers. Jane Street reportedly spread its hedging across multiple hours to minimise market impact and settlement price uncertainty.
In the afternoon, Jane Street sold its long equity positions over a three-hour period, which it will argue is consistent with global best practices in managing expiry-day risks.
Booming Retail Activity in India’s Options Market
India has emerged as the world’s largest derivatives market by contracts traded, fueled by an explosion in retail participation. Options turnover is now over 300 times that of cash equities, a dynamic that global firms like Jane Street have capitalised on due to their capital strength and algorithmic sophistication.
But this retail boom has come at a cost: cumulative losses in the billions for local investors. The sharp rise in retail speculation has forced SEBI to intensify its regulatory focus on derivatives trading and reassess the role of sophisticated foreign players.
“Critics of Jane Street say the sheer size of its positions built up over a short time would have given the firm market-moving power, even if the trades were within regulatory limits,” as mentioned in the report by Bloomberg.
Peer Criticism: ‘Strategy IS Market Impact’
The controversy has also sparked sharp public commentary from industry peers. Alexander Gerko, billionaire founder of rival firm XTX Markets, openly questioned the legitimacy of Jane Street’s strategy on LinkedIn.
“Any ‘normal’ strategy works worse as it scales up, due to market impact, unless your strategy IS market impact,” Gerko wrote, challenging Jane Street to prove its India trades would still be profitable if scaled down by a factor of 100.
What This Means for India’s Regulatory Landscape
Legal experts believe this case may have far-reaching implications for how India regulates global trading strategies.
Abhiraj Arora, a partner at Saraf and Partners and a former SEBI official, told Bloomberg that while the regulator’s order presents “a compelling narrative,” it’s too early to conclude that Jane Street violated laws.
“The Jane Street case ultimately serves as a significant test for India’s regulatory framework and its capacity to oversee increasingly complex global trading practices,” Arora said.
He also warned that an overly aggressive crackdown could backfire by widening bid-ask spreads, reducing market liquidity, and making trade execution costlier for investors.
What’s Next?
Jane Street has not yet publicly commented in detail but is expected to submit a comprehensive reply to SEBI’s interim order in the coming weeks. Meanwhile, SEBI’s final ruling could shape how other global firms structure their operations in India, especially those engaged in options market making.
As India’s markets mature and attract more international attention, the challenge will be to strike a balance between protecting retail investors and allowing innovation and liquidity provided by global market participants.
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(With Inputs From Bloomberg)