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Business Standard

Jane Street to resume trading: Arbitrage vs market manipulation explained

US-based trading firm Jane Street found itself at the centre of a regulatory storm in India, after the market watchdog accused it of manipulating index prices to boost profits at the expense of retail investors. On July 3, the Securities and Exchange Board of India (Sebi) temporarily barred the firm from participating in its securities markets. The regulator alleged that Jane Street carried out a coordinated trading strategy that distorted prices in India's Bank Nifty index, misleading investors and profiting from the resulting volatility. Jane Street, which has denied any wrongdoing, is now challenging the order and has deposited more than ₹4,800 crore (around $560 million) into an escrow account and has resumed trading in the Indian market. The case has left some institutional investors unsettled and may even serve as a larger wake-up call for India's financial market, sparking debate between legal arbitrage and illegal market manipulation. Here's a closer look at what this means. What is Jane Street? Jane Street is a global quantitative trading firm that uses mathematical models and algorithms to trade rapidly and across markets. With operations in more than 45 countries and over 3,000 employees, it is one of the largest players on Wall Street. In 2023, the firm reportedly accounted for more than 10.4 per cent of North America's equity trading volume, up from 7.6 per cent in 2022, according to a report by the Financial Times. In India, the firm traded heavily in both the cash market, where investors buy and sell actual shares, and the derivatives market, where traders use instruments like options and futures to bet on future price movements. What is an arbitrage trading strategy? Arbitrage is a legal trading strategy that takes advantage of price differences in different markets. This means that if a stock is trading at slightly different prices across two exchanges, a trader can buy low in one market and sell high in another. In India, arbitrage often occurs between the cash market and derivatives market, where traders can simultaneously buy and sell related assets to lock in small, low-risk profits. Arbitrage is legal in India as long as these trades are based on existing inefficiencies and do not attempt to create false price movements. Arbitrage may even be beneficial as it can help align prices, thereby improving market efficiency, as former Sebi primary market board member V Raghunathan told CNBC. What is market manipulation? Market manipulation is illegal. It involves deliberately distorting prices or creating a misleading impression of market activity. This could include tactics like artificially inflating demand, moving prices without a valid economic reason, or placing trades solely to influence market outcomes. Difference between arbitrage and market manipulation The difference between arbitrage and manipulation lies in intent and impact. Arbitrage works within the natural functioning of markets, while manipulation seeks to interfere with it. The latter can often harm other investors in the process. What are Sebi's accusations against Jane Street? According to Sebi, Jane Street used multiple entities to carry out a coordinated trading strategy in the Bank Nifty index. The market regulator alleges that one entity bought large volumes of banking stocks in the early morning, which pushed up the index price. At the same time, another entity took positions in the derivatives market anticipating a fall in the index. Near the close of the trading day, particularly on expiry days when derivative contracts are settled, Jane Street is alleged to have sold off the earlier stock purchases in large volumes, pushing the index lower. This price drop, Sebi claims, boosted the profitability of the firm's bets on falling prices. This practice is known as 'marking the close', which is considered manipulative if it involves intentionally influencing prices during the final minutes of trading. Sebi argues that Jane Street's actions created an artificial and misleading appearance of market activity, which in turn caused retail investors to trade at distorted levels and suffer losses. Jane Street's response to Sebi allegation Jane Street has denied any manipulation, describing its actions as basic index arbitrage. The firm has not commented publicly but has indicated it intends to challenge the regulator's order. On July 14, Jane Street deposited ₹4,844 crore into an escrow account, a step that Sebi said was required while reviewing the firm's request to resume trading in Indian markets. Broader market reaction and regulatory concerns The episode has unsettled parts of the institutional investor community. Although Indian stock indices are near all-time highs, foreign institutional investors (FIIs) have become increasingly cautious, particularly around midcap and smallcap stocks, where valuations appear stretched and liquidity is thinner. Jignesh Desai, chief executive for institutional equities at Centrum Broking, told Business Standard, 'FIIs are looking for consistency and predictability in regulatory actions, especially around high-frequency and algorithmic trading. As long as Sebi maintains transparency and market stability, this episode is unlikely to deter long-term foreign capital.' Read the full interview here. Meanwhile, K P Krishnan, honorary senior fellow at the Isaac Centre for Public Policy, has pointed out that the outcome of this case will matter not just for Jane Street but for how India defines and regulates complex trading in its increasingly sophisticated markets. What does this crackdown mean? The Jane Street case has raised critical questions about how modern financial markets operate — and how regulators balance market growth and activity with investor protection. Sebi recently reported that 91 per cent of retail traders lost money in the derivatives market last year, with total losses exceeding ₹1 trillion. While these losses cannot be attributed to any single firm, the contrast between large institutional profits and widespread retail losses has renewed concerns about market fairness. Sebi's intervention in this case could mark a turning point in how such strategies are policed.