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The bumpy road of derivatives: Take a close look at Jane Street's potholed path to market riches
Jane Street' is the title of multiple songs and the name of an indie rock band as well. Another Jane Street is currently in the public eye, a Manhattan-based high- frequency trading firm that was banned recently by the Securities and Exchange Board of India (Sebi), the market regulator.
The firm has been allowed back into the market after it deposited over $550 million as a good-faith gesture while the regulator's investigation proceeds alongside. The Jane Street saga has raised multiple questions about India's regulatory framework for the securities market, especially the kid-glove handling of equity derivatives since their formal launch in 2001. There are also concerns over the nature of inter-regulatory monitoring and coordination, and whether it is adequate to stem malpractices in Indian capital markets.
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History holds some lessons. There was always the whiff of something rotten in the kingdom of Indian derivatives ever since futures and options were introduced afterbadla, an opaque over-the-counter product, was definitively banned. India's 1991 economic reforms took a wrecking ball to the old micro-structure of capital markets.
Prodded by the 1992 securities scam, reformers decided to introduce transparent equity derivative products. But, given the political influence of the stockbroking lobby, it took a while to finally introduce futures and options;badlahad kept popping up in different forms.
Unsurprisingly, Sebi decided to introduce individual equity futures alongside index products, contrary to official recommendations and global best practices. This was seen as a concession to the influential community of stockbrokers, who were in search of a speculative—and liquid—product to replacebadla.
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There was another deviation from the 1997 L.C. Gupta Committee report, which had made the official recommendations: instead of physical settlements, the regulator chose cash settlements. Sebi's initial excuse was that exchanges lacked the required technology, infrastructure or management capacity to cope with the burden of physical settlements. Consequently, the futures and options market became a casino with no cover charge, or minimum buy-in requirements, fuelling large and unnatural spikes.
Faced with the spectre of a market collapse and a crisis, Sebi finally implemented physical settlements in 2018 after a gap of 17 years. Meanwhile, retail investor interest shifted from equity futures to index options, given the opportunities for higher leverage and relatively lower capital requirements. Fintech firms acted as enabling midwives in the process, while the regulators looked away.
And now along comes Jane Street and Sebi's interim order. Opinion remains divided over whether Jane Street's derivatives trading strategy was illegal, whether it was 'manipulation' or whether the trading firm was plain unlucky because its heavy volumes stood out in the Indian market's shallow infrastructure. However, on closer inspection, the market structure does seem to embolden rampages by high-frequency traders, perhaps at the cost of clueless retail speculators.
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Let's try and connect some of the dots. Sebi's tracking data shows that a bulk of the derivatives trade orders originate from co-located servers, or from institutional traders that pay a higher fee to locate their servers next to the exchange servers, thus allowing them to strike deals within nano-seconds.
According to Sebi's 2023-24 annual report: 'Based on modes of trading at exchange platform… 61.6% trading in the equity derivatives segment of NSE was through co-location route, primarily used by proprietary traders… In case of BSE, 60.1% trading in the equity derivatives segment of BSE was through co-location route."
Simultaneously, there has been a surge of uninformed retail investors entering the derivatives market, lured by the facility of low capital commitment and easy profits. Sebi whole-time member Ananth Narayan said at a recent conference that 91% of individual traders incurred net losses in equity derivatives during 2024-25, with the total losses crossing ₹1 trillion.
Although it may be difficult to prove a direct link, it does beg the uncomfortable question: Were retail investors the counter-parties that Jane Street and other traders needed to rack up their super-profits? Juxtapose those retail losses against Sebi's estimate of Jane Street's profits of ₹36,500 crore over two years.
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Sebi took some remedial action in October 2024 and May 2025 to deter retail traders, but the damage had already been done. It is surprising that Sebi chose to ignore repeated red flags raised by multiple market observers over the past two-three years, even when data was pointing to unnatural spikes. And though Jane Street has now been identified, Sebi should also reveal the names of Indian companies indulging in similar manipulation.
Sebi must also identify fintech companies that inveigled unschooled retail investors into derivatives trading, thereby providing large traders with easy pickings. This may require Sebi to coordinate regulatory action with the Reserve Bank of India (RBI) because many firms helped investors take unsecured loans to satisfy their speculative urges.
The Sebi-RBI combo should also coordinate efforts to overhaul the profile of India's derivatives market in favour of large institutional traders, especially by reworking the outdated rule that limits bank finance for institutions.
The author is a senior journalist and author of 'Slip, Stitch and Stumble: The Untold Story of India's Financial Sector Reforms' @rajrishisinghal
