Jane Street manipulated markets through complex trades on expiry days: SEBI

In an interim order dated 3 July, India’s capital markets regulator SEBI has alleged that global quantitative trading firm Jane Street engaged in a sophisticated scheme to manipulate index derivatives, particularly around expiry days, using an India-based entity to circumvent regulatory restrictions imposed on foreign portfolio investors (FPIs).

At the heart of the case is a series of trades executed on 17 January 2024 — Bank Nifty options expiry day — which SEBI claims were designed to artificially move the market in favour of Jane Street’s significant options positions. According to the interim order, the firm executed large-scale intraday trades in the cash and futures segments, using its Indian arm, JSI Investments Pvt Ltd, a move that flouts FPI regulations which prohibit same day squaring off of positions.

SEBI’s investigation outlined a two-phase trading pattern. In “Patch I” during the morning session, Jane Street allegedly purchased large quantities of Bank Nifty component stocks and index futures, pushing the index upwards. Later in “Patch II,” the firm reversed those positions, aggressively selling to drive the index down.

While this strategy resulted in declared losses of over Rs 61.6 crore in cash and futures, the regulator concluded that the real gains were harvested from options positions that benefitted from the induced market volatility.

SEBI highlighted the premeditated nature of the activity, stating that the trading lacked economic rationale in isolation. The regulator’s assessment, based on a “preponderance of probability”, suggested that Jane Street had no intention of holding these positions to settlement, a direct violation of FPI norms.

Simultaneously, Jane Street reportedly held a large options book—selling calls and buying puts—that stood to profit from sharp intra-day market swings. By briefly pushing the index higher and then pulling it down before close, the firm allegedly created artificial price movements that misled other market participants, particularly those pricing trades off spot levels.

As per SEBI’s findings, Jane Street recorded a staggering Rs 43,289 crore in profits from index and stock options trades, even as it absorbed losses of Rs 7,208 crore in stock futures, Rs 191 crore in index futures, and Rs 288 crore in the cash equities market.

SEBI termed the practice a classic case of “marking-the-close,” a manipulative strategy where entities with large near-expiry options exposure aggressively influence the spot index.

The order also warned that such market manipulation—especially on expiry days—can harm the broader market, particularly retail investors. A prior SEBI study had revealed that 93 per cent of over one crore retail F&O traders incurred losses between FY22 and FY24.

In separate statements veteran trader Santosh Pasi called SEBI’s data analysis “very impressive,” while fund manager Samir Arora said the order represents a “clear case of manipulation,” adding that no serious market participant would want to see artificial index movements driven by one player.

The current cease-and-desist directive gives Jane Street the opportunity to respond and present its rationale before a final ruling is issued. However, SEBI sources suggest that this is only the beginning.

The regulator is reportedly analysing Jane Street’s trades in other indices such as the Nifty, Sensex, Bankex, Nifty IT, Nifty Midcap, and various stock options to determine if similar manipulation occurred. Given the enormous volume of trading data involved, the full investigation could take another six months.

SEBI’s interim order also observed that Jane Street’s trades were sometimes conducted even in declining markets, misleading other investors into believing that prices would rebound, only for the firm to initiate bearish bets that profited from subsequent declines.

Jane Street, for its part, has disputed SEBI’s findings and is expected to present its defence in the coming proceedings.

In response to growing concerns about market manipulation in non-benchmark indices, SEBI had issued a circular on 29 May introducing revised eligibility criteria for derivative trading.

These include a minimum of 14 constituents in an index, a cap of 20 per cent on the top constituent’s weight, and a combined weight cap of 45 per cent for the top three constituents. This move aims to make indices less susceptible to distortion by large trades and enhance the structural integrity of derivative markets.

While the Jane Street episode might underscore SEBI’s growing sophistication in surveillance and forensic market analysis, it also points to how complex, cross-segment strategies that exploit market inefficiencies are being blatantly carried out impacting investor trust and affecting the larger integrity of Indian capital markets.