'Marking the close' explained in 5 points: Trick inside Jane Street's alleged manipulation playbook

Economic Times

4 hours ago

TIL Creatives Jane Street used expiry-day stock moves to shift index options premiums, exploiting algorithmic trades to manipulate prices and gain an unfair edge in Indian markets.
Jane Street Group LLC, a US-based global proprietary trading powerhouse, which allegedly manipulated the Indian derivatives market, employed a strategy called 'Marking the close' on the Nifty index options.
1) Any option contract has an underlying stock, and its premium moves with the price of the underlying stock. For Instance, HDFC Bank's CALL option premium will rise if the stock price of HDFC Bank rises while its PUT option premium will rise with a fall in its price.
2) The logic can be extended to the index options, too. For instance, if the Nifty index moves higher, then the Nifty CALL option premium increases and the same is the case with the Bank Nifty. For index options, the underlying is the index itself, which in turn is a basket of stocks. 3) How Options premiums work Option premiums are calculated based on stock/index's current price vis-a-vis the strike price. Strike price is the price at which you exercise the option.
So Premiums are high when they are at-the-money or in-the-money.
-- In-the-money (ITM) call option: Current price is higher than strike price
-- In-the-money put option - Current price is lower than strike price
-- At-the-money (ATM) call/put option: Current price is close to strike price
4) On expiry days, OTM (Out of the Money) options are cheap because they are likely to expire worthless. ATM options are most volatile because they near the strike price and anything can happen. But for ITM options, they are fully loaded and available at a premium.
Read More: Sebi may widen Jane Street probe to other indices, exchanges: Report
For an options trader, the catch lies in the transition of premiums if he can buy a cheap OTM option for 50 paisa or a rupee and then watch it grow to Rs 10, 20 or even 100 in a matter of a few hours. Traders with deep pockets can make this possible and Jane Street's deep pockets seem to have that kind of money.
5) On the expiry day, you buy all the cheap Index OTM options on one hand and on the other hand, you either buy or sell the index underlying constituents to an extent where the options start to move in your favor. Sophisticated traders can do it by just buying or selling heavyweight stocks of the index. Traders can buy all the cheap options before 3 pm and after that, they can accordingly make orders worth crores of rupees in the heavyweight stocks.It can be done through algorithms which know the exact quantity, price and time, which makes computation of the expiry closing price easy, as the closing price is the weighted average of the last 30 minutes.The algorithms know the closing price which in turn makes your position favourable.
Also Read: Jane Street Fallout: Zerodha's Nithin Kamath flags risk to brokers and stock exchanges
Market regulator Sebi holds this as an unfair, deceptive, and manipulative practice that violates its norms.Sebi's 105-page order holds that Jane Street made unlawful gains through this. Jane Street has refuted these allegations and has said that it will engage with the regulators.
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