MUMBAI: The high-stakes confrontation between a global derivative trading giant and a powerful national regulator has turned into a defining moment for India’s futures and options (F&O) market.
At the centre of this battle is the US-based Jane Street Group, which stands accused of market manipulation by the Securities and Exchange Board of India (SEBI). But the firm’s defenders and several market experts are posing a difficult counter-argument:
Were Jane Street’s actions a calculated manipulation of the market, or can they be viewed as the actions of an exceptionally ‘smart trader’ using superior technology to provide liquidity to a booming, yet volatile, market?
This is the central question that now hangs over India’s multi-billion dollar derivatives market. The issue is not whether Jane Street is a sophisticated player; which is undisputed.
The debate, which is live among market experts, is where the fine line lies between aggressive, high-frequency trading and outright manipulation.
One side argues that Jane Street was a crucial market maker, merely engaging in standard arbitrage to fulfill the massive options demand from retail investors.
The other side alleges that the sheer scale of the firm’s trades was not just a response to the market, but a deliberate effort to engineer its movement for a significant profit.
The final verdict, therefore, will not just determine the fate of one firm, but will act as a landmark ruling. It will legally define what constitutes market manipulation in an era of ultra-fast trading and powerful algorithms.
The outcome will set a precedent for how regulators oversee the world’s most active derivatives market, either by drawing a firm line that protects small investors or by giving sophisticated traders a wider berth to operate in a market whose rapid growth has outpaced its rulebook.
The question of individual traders
The high-profile showdown between Sebi and US trading giant has thrown a harsh spotlight on a fundamental dilemma at the heart of India’s derivatives market.
The very attributes that have made the market a global powerhouse – massive volumes, high liquidity, and frequent expiries driven by speculation – are the same ones that have created a landscape where 91 per cent of individual traders suffer losses.
Now, as the regulator pushes for structural reforms, it finds itself trapped in a difficult “catch-22”: To protect the small investor, Sebi must curb the speculation that fuels this high-risk environment.
Yet, it is this very speculation that draws in the big, sophisticated players like Jane Street who provide the liquidity and depth that the market needs to function efficiently.
This report also explores the high-stakes balancing act Sebi must perform: Does it prioritise safeguarding the individual retail trader from a speculative trap, potentially at the cost of alienating the big players who provide the market with its very lifeblood?
The answer will not only determine the fate of a multi-billion dollar market but will also define Sebis regulatory legacy for years to come.
The recent crackdown by the Securities and Exchange Board of India (Sebi) on US trading giant Jane Street has become a watershed moment for India’s booming but controversial futures and options (F&O) market.
Far from being an isolated incident, the case has brought to the forefront a wider debate about market integrity, regulatory overreach, and the protection of retail investors who have incurred billions in losses through F&O trading.
We are trying to give an update on the conflict and analyse the likely direction of the regulatory landscape, which appears to be on the verge of significant structural reforms.
Allegations and Jane Street’s defence
Sebi’s preliminary findings, detailed in a 105-page interim order, allege that Jane Street engaged in market manipulation on multiple days, most notably on January 17, 2024.
Jane Street modus operandi
The regulator claims the firm aggressively bought constituent stocks of the NSE Nifty Bank Index in the cash and futures markets to artificially influence the index’s intraday price, then profited from a much larger bearish options position – by buying put options or selling call options, to make big money.
Jane Street, which was temporarily banned but had the ban lifted after depositing Rs4,840 crore into an escrow account, is preparing its defence.
It is expected to argue that it was merely acting as a market maker, facilitating outsized demand from India’s retail investors.
Arbitrage: It will likely state that it was engaging in standard arbitrage trades to close the price gap between options and the underlying shares, a common practice in global derivatives markets.
Partial hedging: The firm may argue that the retail demand was so large that only partial hedging was possible and that it spread out its hedging activity over a longer period to reduce its market impact.
The company’s defence frames its actions as a response to market forces, not as manipulation.
“We can have PhDs too”
The regulator has shown no signs of backing down. Sebi Chairman Tuhin Kanta Pandey has aggressively defended the probe, pushing back against claims of overreach and asserting that the regulator is fully capable of matching the expertise of sophisticated global traders in derivative trading space too.
His statement, “Jane Street guys are brilliant mathematicians, but we can have PhDs too,” signals a new era of regulatory confidence and resolve.
Sebi’s actions are part of a broader, well-documented push for “structural reforms” in the derivatives market. The regulator is deeply concerned about two key issues:
Retail losses: A recent Sebi study found that a staggering 91 per cent of individual F&O traders incurred net losses in FY25, with total losses exceeding Rs1 trillion (Rs1 lakh crore). This is a primary driver behind the regulator’s renewed focus on “protecting the small investor.”
The F&O market is now more than 300 times larger than the cash equities market, a massive imbalance that Sebi officials have deemed “unhealthy” and a potential source of systemic risk.
Path forward
The fallout from Sebi’s actions has been immediate. Media reports indicate that HFTs are in a ‘wait-and-watch’ mode, curbing their activity and providing less liquidity.
In fact, the brokerage houses are feeling the squeeze. With F&O volumes and profits sharply down, many brokerage houses said to have been forced to diversify into wealth management and lending to survive.
However, the path forward is not expected to be a sudden, disruptive change. The Sebi chairman has clarified that reports of an immediate curb on weekly expiries are “false and speculative.”
High-volume, short-term speculation has been a hallmark of India’s F&O market, and many experts have been arguing against weekly expiries in order to contain the high-ampere speculation in the derivative market.
The Sebi chairman stated that any structural reforms would be a result of a formal consultation process with market participants. This suggests that Sebi is seeking a balanced approach, aiming to address the fundamental issues without creating market panic or harming liquidity.
Double-edged sword
The Jane Street case is an acid test for India’s regulatory framework and its ability to oversee increasingly complex global trading practices. The ‘central irony’ is that the very phenomenon that made India’s derivatives market so attractive to global firms – the massive, unhedged retail trading volume – is now the reason for the regulatory crackdown.
The story of India’s F&O market is a double-edged sword: For a time, it was a massive revenue generator for exchanges, brokers, and sophisticated trading firms, drawing in global capital and technological expertise.
It was also a vehicle for massive and sustained losses for a large portion of the retail investor base, a situation the regulator can no longer ignore.
The outcome of the Jane Street case and the nature of the upcoming structural reforms will determine whether India can find a sustainable middle ground – a derivatives market that is both transparent and robust, where a global trading firm can operate without “rubbing the regulator the wrong way” and where retail investors are protected from a system that has proven to be stacked against them.
