Jane Street Fallout: Zerodha's Nithin Kamath flags risk to brokers and stock exchanges
Synopsis SEBI's action against Jane Street may be justified, but it could have unintended consequences, warns Zerodha CEO Nithin Kamath. With prop firms like Jane Street driving nearly 50% of options volumes, their exit could dent retail participation and impact brokers and exchanges. Market regulator Sebi's crackdown on Jane Street may have been necessary, but it could spell trouble for stock exchanges and brokers, according to Zerodha Founder and CEO Nithin Kamath. Highlighting the broader impact, Kamath warned that if proprietary trading firms like Jane Street, which account for nearly 50% of options volumes, pull back, retail participation could also take a hit.
ADVERTISEMENT "...there's a flip side. Prop trading firms like Jane Street account for nearly 50% of options trading volumes. If they pull back— which seems likely —retail activity (~35%) could take a hit too. So this could be bad news for both exchanges and brokers," Kamath said in a tweet.
Lauding SEBI's intervention, Kamath said that if the allegations are proven, it would amount to blatant market manipulation.
"You've got to hand it to SEBI for going after Jane Street. If the allegations are true, it's blatant market manipulation. The shocking part? They kept at it even after receiving warnings from the exchanges. Maybe this is what happens when you're used to the lenient U.S. regulatory regime. Think about the structure of U.S. markets: dark pools, payment for order flow, and other loopholes that allow hedge funds to make billions off retail investors. None of these practices would be allowed in India, thanks to our regulators," the tweet said further."The next few days will be telling. F&O volumes might reveal just how reliant we are on these prop giants. I'll share more data as and when anything interesting turns up," Kamath tweeted.Jane Street, one of the world's most sophisticated trading firms, allegedly pulled off a Rs 36,500 crore market scam, making a whopping Rs 43,289 crore in options profits while deliberately losing Rs 7,208 crore in futures and equities.
ADVERTISEMENT The market watchdog in a 105 page order issued on Thursday imposed comprehensive interim restrictions on Jane Street pending detailed investigation. Jane Street entities are completely restrained from accessing securities markets and prohibited from buying, selling, or dealing in securities directly or indirectly.The regulator also ordered impounding of Rs 4,843.57 crore in unlawful gains, requiring Jane Street to deposit this amount in an escrow account with a lien in favor of SEBI. All bank accounts, demat accounts, and custodial accounts are frozen, with no debits allowed without SEBI permission (though credits can be accepted).
ADVERTISEMENT The entities also cannot dispose of or alienate any assets in India until the unlawful gains are deposited in the escrow account.Sebi has given Jane Street 21 days to file objections, and it can request a personal hearing. The interim restrictions remain in force until further orders from SEBI.
ADVERTISEMENT Meanwhile, the stock exchanges have been directed to closely monitor any future dealings by Jane Street to ensure they don't engage in manipulative activities using the patterns identified in the order.
Read More: Explained: What is Jane Street and how it made Rs 36,500 crore profit by gaming Dalal Street
ADVERTISEMENT 'Jane Street is committed to operating in compliance with all regulations in the regions we operate around the world,' the firm said in an emailed response to Reuters. 'Jane Street disputes the findings of the SEBI interim order and will further engage with the regulator.'
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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