Jane Street vs SEBI: As trading firm seeks relief, a recall of its actions and the regulator’s allegations of market manipulation

Written by John Varun Bissell India’s markets regulator has banned the New York-based proprietary trading firm Jane Street Capital for alleged market manipulation to make major illicit gains that it took out of the country. Jane Street has refuted the allegations about unlawful trading practices but has deposited more than Rs 4,800 crore in an escrow account, in compliance with the requirements of the interim order passed by the Securities and Exchange Board of India (SEBI) on July 3. Story continues below this ad In a leaked email sent to employees, Jane Street said it was “beyond disappointed” with SEBI’s “extremely inflammatory” accusations. The company is set to contest the ban and the freezing of some of its funds. Jane Street has formally requested access back to its trading activities in India. SEBI has said it is in the process of examining the company’s request. How did things build up to SEBI’s investigation? On January 17, the privately owned hedge fund took home a whopping Rs 735 crore in a single day by allegedly implementing algorithms that allowed them to manipulate NIFTY and Bank NIFTY index prices. This wasn’t a one-off – between January 2023 and March 2025, Jane Street allegedly made unlawful net profits of more than Rs 36,500 crore. Story continues below this ad The capital markets watchdog started looking closely at Jane Street’s operations in April 2024, after taking note of a legal dispute in the United States (which was, however, quickly settled) between Jane Street and a rival company that had hired two employees who were crucial in the development of these confidential algorithms. SEBI cracked down this month, precluding Jane Street from trading in the Indian markets and ordering banks to freeze more than Rs 4,800 crore in their accounts. In a 105-page interim order, SEBI accused Jane Street of market manipulation. How did Jane Street allegedly seek to dodge SEBI? Jane Street relied on several factors to pull off its alleged illegal “operation” in the Indian market. These include the creation of multiple Indian subsidiaries to bypass a requirement in SEBI’s 2019 “Foreign Portfolio Investors” regulation that states, “A foreign portfolio investor shall transact in the securities in India only on the basis of taking and giving delivery of securities purchased or sold.” Story continues below this ad This rule blocks intraday trading (buying or selling of stocks on the same day they were obtained, all before the market closes) for foreign firms. In this case, Jane Street’s Indian subsidiaries were technically allowed to indulge in intraday stock trading, “pumping and dumping” prices for their convenience. All this happened while foreign subsidiaries (owned by Jane Street as well) held positions on optimal options that generated significant profits. How did this alleged strategy work? SEBI suspects that Jane Street’s algorithm-based strategy consisted of two main stages: Intra-day Index Manipulation and Expiry Day Manipulation. Early in the day, Jane Street’s algorithms would rapidly buy major banking stocks that were components of the “Bank NIFTY” index. This would artificially drive the price of the index up. Noticing this, thousands of retail investors would jump on the rise, buying call options and selling puts, hoping for persistent growth. However, the rise would be spurious, allegedly orchestrated by Jane Street, which was buying put options and selling calls. Story continues below this ad Notably, on contract expiry days, Jane Street’s algorithm would dump its index futures and holdings, resulting in a sudden decline of the share price. This led to massive losses for retail investors, whose call options would be labeled useless and who would be forced to pay the premium. For Jane Street, the opposite happened – they were able to cash out on their put options for monumental returns. Without their specifically catered algorithms, Jane Street would not have been able to pull off this alleged operation at the scale that they did. The algorithms were able to make multiple targeted trades within milliseconds of executing. What are some takeaways from this episode for retail investors? The derivatives market predominantly consists of futures and options (F&O) trading. Futures are contracts that legally bind holders to buy or sell a certain asset at an agreed-upon price at some time in the future, regardless of what the price is then. Thus, this benefits buyers when the price has increased and sellers when it has decreased (compared to the predetermined price). Options are contracts that give buyers the right (not an obligation) to purchase an asset from a willing seller at some time in the future. To ensure fairness, buyers are required to pay the seller a premium right after signing. Story continues below this ad There are two types of options contracts: call options and put options. Call options give holders the ability to buy the asset at the predetermined price. Put options allow the holders to sell the asset at the predetermined price. So, if the price does not suit the holders’ options, they would not be forced to buy or sell their asset but would still have to pay the premium. F&O trading is one of the riskiest trading choices a retail investor can make. According to SEBI, more than 9 out of 10 retail investors in India have lost money in FY25 trading on F&Os. However, it is possible to minimize these risks by understanding ways to optimally use F&O trading, potentially in terms of limiting capital expended, enhancing risk tolerance, and more. The writer is a student and a summer intern at The Indian Express