A Recap of the Controversy
India’s markets regulator, Securities and Exchange Board of India (SEBI), has banned the New York-based proprietary trading firm Jane Street Capital for alleged market manipulation. The firm has refuted the allegations but has deposited over Rs 4,800 crore in an escrow account, as per the requirements of the interim order.
Jane Street has formally requested access back to its trading activities in India, which SEBI is currently examining.
How Did Things Build Up to SEBI’s Investigation?
On January 17, Jane Street allegedly made a whopping Rs 735 crore in a single day by implementing algorithms that allowed them to manipulate NIFTY and Bank NIFTY index prices. This was not a one-off – between January 2023 and March 2025, Jane Street allegedly made unlawful net profits of more than Rs 36,500 crore.
SEBI started looking closely at Jane Street’s operations in April 2024, after taking note of a legal dispute in the United States between Jane Street and a rival company that had hired two employees crucial in the development of these confidential algorithms.
How Did Jane Street Allegedly Seek to Dodge SEBI?
Jane Street relied on several factors to pull off its alleged illegal ‘operation’ in the Indian market. These include the creation of multiple Indian subsidiaries to bypass a requirement in SEBI’s 2019 ‘Foreign Portfolio Investors’ regulation.
Jane Street’s Indian subsidiaries were technically allowed to indulge in intraday stock trading, ‘pumping and dumping’ prices for their convenience. All this happened while foreign subsidiaries (owned by Jane Street as well) held positions on optimal options that generated significant profits.
How Did This Alleged Strategy Work?
SEBI suspects that Jane Street’s algorithm-based strategy consisted of two main stages: Intra-day Index Manipulation and Expiry Day Manipulation. Early in the day, Jane Street’s algorithms would rapidly buy major banking stocks that were components of the ‘Bank NIFTY’ index, artificially driving the price of the index up.
Noticing this, thousands of retail investors would jump on the rise, buying call options and selling puts, hoping for persistent growth. However, the rise would be spurious, allegedly orchestrated by Jane Street, which was buying put options and selling calls.
The Consequences
Without their specifically catered algorithms, Jane Street would not have been able to pull off this alleged operation at the scale that they did. The algorithms were able to make multiple targeted trades within milliseconds of executing.
SEBI has warned retail investors of the risks involved in F&O trading, highlighting that more than 9 out of 10 retail investors in India have lost money in FY25 trading on F&Os.
What is F&O Trading?
F&O trading is one of the riskiest trading choices a retail investor can make. Futures are contracts that legally bind holders to buy or sell a certain asset at an agreed-upon price at some time in the future. Options are contracts that give buyers the right (not an obligation) to purchase an asset from a willing seller at some time in the future.
There are two types of options contracts: call options and put options. Call options give holders the ability to buy the asset at the predetermined price. Put options allow holders to sell the asset at the predetermined price. So, if the price does not suit the holders’ options, they would not be forced to buy or sell their asset but would still have to pay the premium.
Minimizing Risks
It is possible to minimize these risks by understanding ways to optimally use F&O trading, potentially in terms of limiting capital expended, enhancing risk tolerance, and more.
Jane Street’s alleged market manipulation and SEBI’s warning on F&O trading highlight the importance of investors being aware of the risks involved in these complex financial instruments.
As SEBI’s investigation continues, it remains to be seen what further consequences Jane Street will face and how the markets will respond to this controversy.
