Why SEBI Is investigating Jane Street for market manipulation and what it means for you

The Securities and Exchange Board of India (SEBI) has flagged global proprietary trading firm Jane Street for allegedly manipulating Indian stock markets in an “unusual” way.

This is not your typical market violation involving a single stock or a small group of traders. Instead, SEBI suspects that Jane Street used a complex strategy involving highly liquid stocks to manipulate the Bank Nifty index, raking in massive profits from options trading while misleading the broader market — including retail investors.

What is a proprietary trading firm?

A proprietary (or 'prop') trading firm is a company that trades financial instruments like stocks, derivatives, bonds, or currencies using its own money — not client money — to make profits. These firms take big bets in the market and are known for employing advanced trading strategies using sophisticated algorithms, high-speed trading systems, and a large workforce of financial experts.

Jane Street is one such global prop trading firm. Founded in 2000, it employs over 3,000 people across five countries and trades on more than 200 stock exchanges and platforms globally. In India, it operates through four companies — two based in Mumbai and two registered as Foreign Portfolio Investors (FPIs) in Singapore and Hong Kong.

What exactly is SEBI alleging?

SEBI’s primary allegation is that Jane Street manipulated the Bank Nifty index — an index made up of major banking stocks — on expiry days (the last trading day of options contracts). Here’s how:

Step 1: Jane Street allegedly bought large volumes of key banking stocks early in the trading day. This drove up the Bank Nifty index.

Step 2: Later in the day, it sold those stocks aggressively, causing prices to fall sharply.

Step 3: Meanwhile, Jane Street held large short positions in Bank Nifty options, which gained in value as the index dropped.

This strategy allegedly earned Jane Street massive profits while retail traders and other investors who had taken opposite positions suffered losses. On a single day, 17 January 2024, SEBI alleges that Jane Street made Rs 735 crore using this strategy.

Veteran banker Uday Kotak weighed in on the developments, highlighting three key concerns reflected in the recent actions. First, the growing influence of capital power, second, a widening gap in liquidity between single stocks and third, index derivatives, and how exchange and broker business models are increasingly tied to trading volumes rather than underlying fundamentals.

Emphasising the primary purpose of capital markets, Kotak stressed that they should facilitate fair price discovery and promote capital formation—principles that risk being undermined if manipulative trading practices go unchecked.

How big are the alleged gains?

SEBI estimates that over a two-year period, Jane Street earned Rs 43,289 crore in index and stock options trading, a substantial part of which may have come from unfair market practices. While the firm lost money in stock futures (Rs 7,208 crore), index futures (Rs 191 crore), and cash equities (Rs 288 crore), it still netted a total profit of over Rs 36,500 crore across all segments.

Why is this case being called ‘unusual’?

Market manipulation cases in India typically involve single stocks or smaller segments. In contrast, this case involves multiple high-volume, high-liquidity stocks being used in a coordinated fashion to influence entire index levels, which then impacts the value of thousands of derivatives contracts. That scale and level of coordination is rare and could mark a serious new form of manipulation in India’s markets.

Why does this matter to regular investors?

Retail traders—individual investors like you and me—make up around 35 per cent of options trading volumes in India. Proprietary trading firms like Jane Street make up nearly 50 per cent, and their actions influence market behavior. If these firms pull back due to regulatory pressure, liquidity may reduce, making it harder for retail traders to enter or exit positions efficiently. As Zerodha CEO Nithin Kamath warns, a drop-in prop trading activity could hurt stock exchanges and brokerage businesses and reduce overall trading volumes.

Who are the companies involved?

Jane Street operates in India through four entities: Jane Street Singapore Pte Ltd and Jane Street Asia Trading Ltd, both registered as Foreign Portfolio Investors (FPIs) and incorporated in Singapore and Hong Kong respectively; and two Indian entities—JSI Investments Pvt Ltd, incorporated in December 2020 and wholly owned by Jane Street Europe Ltd (UK), and JSI2 Investments Pvt Ltd, incorporated in September 2024 as a subsidiary of JSI Investments.

According to documents submitted by Jane Street to both SEBI and the NSE, all four entities function in a coordinated manner, with strategic decisions overseen by senior personnel based outside India.

How did this investigation begin?

Jane Street’s operations came under scrutiny after a legal dispute with another firm, Millennium Management. The case revealed that Jane Street had earned $1 billion (approx. Rs 8,300 crore) from trading Indian equity derivatives. That triggered SEBI to launch a deeper investigation, even as the NSE had already closed a separate probe into Jane Street’s irregular trades.

What happens next?

SEBI has so far examined trading activity on 18 expiry days for the Bank Nifty index and three for the Nifty index. However, the investigation is set to expand further to include additional index expiry days, scrutinise trades conducted on other stock exchanges, and examine potential manipulation in other indices, such as the Nifty 50 and various sector-specific benchmarks.

While Jane Street has disputed SEBI’s findings and maintains that it operates in full compliance with regulations across all jurisdictions, the regulator has stated that its probe remains ongoing, with no specified timeline for completion.

This case is being touted as one of the most significant investigations in Indian market history. One, that raises tough questions about the impact of high-volume algorithmic traders on market fairness, especially for small investors. As SEBI digs deeper, the outcome could potentially reshape how proprietary trading is regulated in India.