Eye on trades, not curbs: How far can smart money go before it's called fraud?

Economic Times

a day ago

Sebi's order last week, accusing Jane Street Capital of manipulating the stock market, is an acknowledgement of what some have suspected for a long time. Surging valuations of risk assets and the influx of thousands of new investors into the trading arena have propelled Indian derivatives to the top of the global volumes leaderboard. Meanwhile, vulnerabilities in a system prone to potential manipulation went unnoticed amid the euphoria of the middle class' immersion in the equity culture.Investigations by the regulator, and details that the probe team delved into, make it the most interesting case in Sebi's three-decade history. The regulatory impounding of illegal gains of ₹4,843 cr is unprecedented, too.
The magnitude of Jane Street's operations in the Indian markets and the regulatory reaction throw up questions about the state of equities market, regulations and legal provisions to deal with such practices. The loss from the punitive order is too much for anyone to let go unchallenged. Analysis and matching of derivatives trades and transactions in the cash market are sufficient to conclude the accused company's intention to profit from its simultaneous actions in both markets rather than benefiting from general market movements independent of its trades.Is it manipulation, strategy or an elaborate web of fraud - or is it just that a well-funded company exploited a lack of rules specifying individual intra-day exposure in the derivatives market, and a lack of effective surveillance?There are many regulations the order cites as violations by Jane Street, but the one by which it could be hooked is Regulation 4(E) of the Prohibition of Fraudulent and Unfair Trade Practices Regulations. This clause states, 'Any act or omission amounting to manipulation of the price of a security, including influencing or manipulating the reference price or benchmark price of any securities', is a fraudulent or unfair practice.An analysis of trades reveals that there is a pattern that helped Jane Street benefit substantially by influencing stock and index prices. But the question remains: is this manipulation or a legitimate strategy?Sebi order says, 'It must be emphasised that trading profits by themselves are certainly not an indication of any illegality.' Then what? 'The scale of profits made does not form the basis of the examination's ultimate conclusions/findings - only the underlying trading patterns observed do.'
While the regulator may have zeroed in on market manipulation, it probably did not have legal tools to penalise, which is reflected in its nudging of NSE to serve a 'caution letter' to Jane Street in February. To be fair to Sebi, it has been warning retail investors about how they have been losers in derivatives market. While its internal systems may have thrown up warnings from the 'Oh god, lucky' trades of big institutions, it lacked the legal ground to halt them.For instance, Jane Street disclosed all open positions. It declared its Indian subsidiary that squared off cash market positions, which are barred for FPIs. Much of what FPI has done appears to be in line with the rules.How does the regulator prevent such instances? It appears that the stock market, despite growing, may still be shallow for someone with a big wallet. The instant reaction would be to curb 'speculation' and 'fraud' with tougher rules.
Calling for restrictions is immature in a market that has become the biggest and is budgeted to contribute ₹78,000 cr in securities transaction tax this year. Sebi can address issues that it found to have helped Jane Street. It may have been early in warning about risks of derivatives market but waited until media reports on a legal dispute in the US between Jane Street and its former staff to begin investigations. There is an urgency to react.A surveillance system may only be as good as rules permit it to act on abnormal activities. Sebi and stock exchanges must frame rules that limit concentrated trades by individuals or a few acting together - as in the case of Jane Street, where it constituted nearly a fifth of trades at certain times.Sebi says, 'They were aware, therefore, that the stock and BANKNIFTY prices were being held artificially up for a short period of time by their own aggressive actions in the underlying cash and futures markets.'It may be a valid interpretation of trades, but can it legally amount to manipulation, fraud or just an unfair trade practice?There is some noise calling for a bifurcation of retail and institutional markets, but that could dry up liquidity. What is needed is improved surveillance, not [e-mail] Elevate your knowledge and leadership skills at a cost cheaper than your daily tea. As GenAI puts traditional BPO on life support, survival demands a makeover
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