Jane Street’s India Trades: A Response to Retail Demand or Market Manipulation?
In a move that has raised concerns of market manipulation, Jane Street Group LLC is expected to argue that its controversial Indian options trades were a response to outsized demand from retail investors, people familiar with the matter said.
SEBI, the Securities and Exchange Board of India, had alleged that Jane Street had taken large positions that artificially influenced prices in the country’s stock and futures markets, moving them in favor of its options bets on multiple days.
Jane Street has sought an extension to respond to the interim order, and the trading giant has deposited 48.4 billion rupees ($560 million) in alleged ‘unlawful gains’ into an escrow account, which lifted its temporary trading ban.
Retraction of Market Manipulation Allegations?
According to sources, Jane Street is expected to argue that it was eager to facilitate options bets from the country’s retail investors, knowing it would be largely unhedged. The firm hedged less in India than in other markets and spread out its hedging activity over multiple hours on that day in January 2024 to reduce its market impact.
On that morning, the NSE Nifty Bank Index dropped 3.2% at the open and fell further during the day. SEBI alleged that Jane Street aggressively bought the index’s constituent stocks in the cash and futures markets to manipulate the gauge’s intraday levels, then reversed the trades in the afternoon to profit from a much larger bearish index options position.
Retail Demand and Market Impact
Jane Street is expected to say that high retail demand for options on that index was a key driver behind its trading in the morning. The firm will likely argue that individual traders bought about $4 billion worth of the gauge’s stocks using options in the first half hour of trading, and that Jane Street — which was acting as a market maker — facilitated about $1 billion of that demand.
Those numbers are based on net delta positions, which represent the value of cash equities the options positions are equivalent to when taking into account the derivatives’ sensitivity to the underlying assets’ price moves.
SEBI’s Preliminary Findings
SEBI’s 105-page order detailing its preliminary findings devoted a long section to Jane Street’s trading activity on Jan. 17, 2024, which was the firm’s most profitable day over a roughly two-year period that the regulator scrutinized.
Alexander Gerko, the billionaire founder of rival XTX Markets Ltd., has challenged Jane Street to show that its India trading strategy was ‘legit’ by proving it would work better after scaling it down by a factor of a 100.
Regulatory Framework and Market Impact
The Jane Street case ultimately ‘serves as a significant test for India’s regulatory framework and its capacity to oversee increasingly complex global trading practices,’ said Abhiraj Arora, a Mumbai-based partner at law firm Saraf and Partners who once worked at SEBI’s surveillance and investigations department.
Arora, who isn’t involved in the case, said too harsh a crackdown and excessive surveillance of market makers could lead to wider bid-ask spreads, poorer trade execution, and increased price swings.
Conclusion
The controversy surrounding Jane Street’s India trades has highlighted the need for regulators to balance the need to protect investors with the need to allow market makers to operate efficiently. As the case continues to unfold, investors and traders will be watching closely to see how the regulatory framework evolves to address the complexities of modern trading practices.
