New York-based trading monolith Jane Street has been at the centre of a storm in recent weeks following India’s market regulator banning it from the country’s securities market. Sebi, the country’s market regulator, has charged Jane Street with being engaged in a “sinister scheme”, stating that its “manipulation” of India’s stock market has resulted in small investors trading at “favourable and misleading prices”.
Jane Street declined to comment to the BBC, but the Financial Times quotes the firm as stating in an internal email that it was “beyond disappointed” with Sebi’s order and would contest it. Jane Street was started by a small team of technologists and traders in a very small New York office. It is a quantitative trading firm that employs mathematical models and algorithms to determine trading strategies.
The firm has over 3000 staff who deal in a wide variety of asset classes in 45 countries. The Financial Times reports that the company controlled over 10% of North America’s equity trading volume in 2023, making it a major Wall Street player. India’s stock market has two segments. The cash market is where investors purchase and sell the actual shares of companies, having a part of the business. And the derivatives market is where traders use instruments such as futures and options to speculate on stocks or commodities without taking ownership of the underlying shares.
Sebi alleges the dubious trading activity of Jane Street took place on India’s Bank Nifty index, which follows the performance of 12 major Indian banks. The regulator says Jane Street traded in both the cash and derivatives markets through various entities.
So, at a very crude level, what it is alleged is that one party purchased huge amounts of bank shares, increasing the price of Bank Nifty when the market opened in the morning. At the same time, it is alleged, the second party would bet against the fall in Bank Nifty’s price in the derivatives market.
On expiry date – when the derivative market contracts are settled – as the session at the end of the day dragged on, Jane Street, according to claims, sold off the shares of the bank acquired from the cash market, driving the price of the bank index down. This would settle the bet placed by its other entity in the derivative market on a fall in prices, says Sebi.
“Such a trade is referred to as ‘marking the close’ which is illegal even in the US,” opines Deepak Shenoy, CEO, Capitalmind Asset Management Pvt Ltd in Bengaluru city. Mom and pop investors were left with the money because during the day, they had purchased higher levels of shares, since they were driven up due to the large volumes purchased by Jane Street.
Sebi essentially alleged that Jane Street’s actions brought about “a false or misleading appearance of market activity” and invited “unsuspecting” investors to trade at “artificial and temporary” levels. In this way, it was inducing unsuspecting investors to trade Bank Nifty index options at temporary and artificial interim levels.On 3 July, in a detailed order, Sebi opined that “the integrity of the market, and the faith of millions of small investors and traders, can no longer be held hostage to the machinations of such an untrustworthy actor”.
