US trading powerhouse Jane Street has been allegedly found guilty by India’s market regulator, the Securities and Exchange Board of India (SEBI), of market manipulation. The global trading giant’s massive options profits of Rs 43,289 crore, coupled with deliberate losses of Rs 7,208 crore in futures and equities, sparked serious concerns about the nature of their trading activities.Sebi has concluded this was market manipulation rather than skilled trading strategy. The regulator has taken action against Jane Street Group, alleging their involvement in orchestrating price fluctuations for substantial derivatives profits.Jane Street Group LLC, established in 2000, is a prominent global proprietary trading organisation that began with a group of traders and technology specialists in New York. Since then, it has expanded considerably. It operates across 45 nations with 2,600 staff members.The organisation has built a strong reputation for its proficiency in exchange-traded funds (ETFs) and maintains a substantial presence in global equities, bonds and options markets.The actions against Jane Street have been severe: authorities have frozen Rs 4,844 crore and imposed a comprehensive market prohibition, marking one of the most substantial regulatory actions taken against an international trading entity in India’s financial markets, according to an ET report.What’s the entire Jane Street controversy about? We take a look:
Jane Street’s Alleged Market Manipulation: Modus Operandi
According to the ET report, SEBI’s probe uncovered systematic market manipulation aimed at profiting from substantial index options positions. The investigation showed that Jane Street deliberately influenced stock and index prices to advantage their derivatives trading activities.The investigation highlighted an “Intra Day Index manipulation strategy”. The regulatory body found that Jane Street operated across various market segments simultaneously, including cash equities, stock futures, index futures, and index options, in a way that violated market norms.The organisation executed aggressive purchases of Nifty Bank component stocks and futures in morning trading sessions, artificially driving up prices. Subsequently, they would liquidate these positions through aggressive afternoon sales, causing price declines. This orchestrated trading pattern aimed to influence the index at crucial moments to benefit their substantial options holdings.The regulatory body discovered that Jane Street maintained exceptionally large risk exposures in F&O trading, particularly during index option expiry days. Sebi emphasised that “what sets apart the trading pattern of the JS Group as prima facie being manipulative, is the intensity and sheer scale of their intervention in the underlying component stock and futures markets.”According to Sebi’s findings, the manipulation technique employed was known as “marking-the-close”, where entities holding substantial options positions deliberately influenced the underlying market to their advantage near expiry.The manipulation pattern involved Jane Street’s aggressive acquisition of Nifty Bank component stocks and futures during morning sessions, artificially elevating the index. This misleading price movement influenced other market participants’ decisions, who traded options based on these inflated levels. Subsequently, Jane Street would conduct aggressive sales of their morning acquisitions, triggering index decline, the report said.The organisation generated profits through their substantial options holdings as the index movements aligned with their strategy.Sebi’s investigation revealed that Jane Street entities understood the inevitable decline of Nifty Bank by day’s end, given their planned aggressive liquidation of morning purchases. Other traders, unaware of this orchestrated movement, were led to trade whilst the Nifty Bank was artificially elevated.The regulatory body also discovered instances of “extended marking the close”, where Jane Street conducted substantial selling of index components during closing periods to suppress the index, advantaging their short Call or long Put positions.
Jane Street: SEBI Findings In Numbers
- SEBI’s probe revealed substantial figures demonstrating Jane Street’s extensive involvement in Indian markets. The investigation period showed Jane Street accumulated total profits of Rs 36,502.12 crore across various market segments, according to the ET report.
- The trading behaviour indicated that Jane Street utilised cash equities, stock futures, and index futures segments to influence market prices. The company accepted losses in these areas whilst generating substantial profits through options trading.
- The Foreign Portfolio Investors within the Jane Street group were responsible for substantial trading activities, securing net profits of Rs 32,681 crore, the ET report said. SEBI observed that these earnings were “significantly higher than the average quantum of assets held by these FPIs in India”, suggesting profit repatriation.
- SEBI’s investigation determined that JSI Investments Private Ltd, Jane Street’s Indian subsidiary, was “an integral part of the whole of the JS Group activity”. The Indian entity’s aggressive daily trading in index constituent stocks appeared to lack financial justification beyond influencing underlying indices.
SEBI’s Regulatory Actions Against Jane Street
- SEBI has enforced stringent interim measures against Jane Street whilst conducting a thorough investigation:
- The regulator has mandated the impounding of Rs 4,843.57 crore, identified as unlawful profits. Jane Street must place this sum in an escrow account with SEBI holding a lien.
- The organisation faces a complete prohibition from securities market participation, barring them from any direct or indirect securities transactions.
- Their financial operations are constrained through frozen bank accounts, demat accounts and custodial accounts. Whilst credits are permissible, withdrawals require SEBI’s explicit approval.
- The entities are barred from transferring or disposing of any India-based assets until the specified unlawful gains are secured in the escrow account.
What Can Jane Street Do?
- Following receipt of the order, Jane Street has a 21-day window to submit objections and may request a personal hearing. The restrictions remain valid until SEBI issues further directives.
- The bourses have received instructions to vigilantly monitor Jane Street’s future market activities to prevent any manipulative practices similar to those outlined in the order.
- This regulatory action serves as a crucial precedent regarding SEBI’s authority over international trading organisations and may shape the regulatory framework for foreign institutional investors in Indian markets.
