Sebi bans Jane Street for stock market manipulation. Here's what went wrong

India Today

2 days ago

The Securities and Exchange Board of India (Sebi) has issued an interim order against four entities of the Jane Street Group, accusing them of manipulating the Indian stock market by distorting prices of index derivatives, particularly on expiry days.The regulator said the trades executed by the group were 'prima facie fraudulent and manipulative' and violated the country's capital market regulations.The order was passed against JSI Investments Pvt Ltd, JSI2 Investments Pvt Ltd, Jane Street Singapore Pte Ltd, and Jane Street Asia Trading Ltd.HOW THE MANIPULATION WORKEDSebi found that the Jane Street Group engaged in a repeated trading pattern on weekly expiry days in the BANKNIFTY index.On these days, the group would aggressively buy stocks and stock futures in the morning, pushing up the index level artificially. At the same time, they would build large short positions in index options, buying puts and selling calls, taking advantage of the temporarily inflated index value.Later in the day, the group would aggressively sell the stocks and futures it had bought earlier, bringing down the index level. This would make their bearish options positions highly profitable.On January 17, 2024, one of the days analysed in detail, this strategy led to a net gain of over Rs 734 crore for the group. 'Jane Street Group net purchases INR 4,370.03 crores of BANKNIFTY constituents in cash and futures markets Simultaneously [they] build large short BANKNIFTY positions, 7.3 times the size of the long cash/ futures positions,' the order said.VAST RETAIL PARTICIPATION USED AS LEVERAGESebi observed that index options on expiry days attract a disproportionately large number of retail participants. For example, on January 17, 2024, over 16 lakh unique entities traded in BANKNIFTY index options, compared to just 4,675 in the cash market for top three constituent stocks. Jane Street's strategy, according to Sebi, was designed to exploit this asymmetry.'The vast majority of BANKNIFTY options participants that do not participate in the underlying cash or futures markets look to the index [which was] heavily influenced by the intervention of Jane Street Group,' Sebi said.HIGH PROFITS RAISE RED FLAGSDuring the examination period from January 2023 to March 2025, Jane Street entities earned a total profit of Rs 36,502 crore in Indian markets. Of this, Rs 43,289 crore came from index options trading alone, while the group reported losses in all other segments including index futures, stock futures, and cash segment. 'Profits from Index Options alone accounted for over INR 43,289.33 crore whereas losses in stock futures, index futures and cash cumulatively amounts to INR 7,687.21 crore,' Sebi noted.This unusual concentration of gains from a single segment led the regulator to investigate further. It eventually selected 18 trading days for detailed scrutiny.CAUTION IGNOREDIn February 2025, the National Stock Exchange (NSE), acting on Sebi's instructions, issued a caution letter to Jane Street Singapore Pte Ltd and JSI Investments Pvt Ltd. The entities were advised to refrain from taking large cash-equivalent positions and from engaging in questionable trading patterns.However, the group continued the same behaviour. 'In disregard of the caution letter from the Exchange Jane Street Group was observed to continue to run very large 'cash-equivalent' positions in index options,' Sebi said.WHY INTERIM ACTION WAS NEEDEDSebi said the trades carried out by Jane Street appeared to mislead a large number of market participants. The strategies used—such as "Intra-day Index Manipulation" and "Extended Marking the Close"—were considered to be in violation of the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) regulations.'In the facts and circumstances of this case immediate action is warranted to prevent further violation of securities laws,' the regulator said.The current order is interim in nature, pending a final decision. However, Sebi's move sends a strong message against entities that misuse market structure and retail flows for large profits.- Ends
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