Swift and Harsh Actions: Explanation Behind SEBI's Prompt and Tough Response Towards Jane Street
In a significant move, the Securities and Exchange Board of India (SEBI) has barred four subsidiaries of US trading firm Jane Street from trading in Indian markets. The ban came after an investigation revealed that Jane Street had engaged in a sophisticated intraday index manipulation scheme, aimed at generating massive illegal profits.
The modus operandi of Jane Street involved manipulating the Bank Nifty and Nifty 50 index levels through aggressive and strategic trading around index expiry days. SEBI found that the firm would buy large quantities of Bank Nifty futures and constituent stocks in the morning session, artificially inflating the index levels. Simultaneously, they would take massive short positions in options that would benefit if the market fell, creating a setup for intra-day price manipulation.
Later in the day, Jane Street would aggressively sell off large amounts of futures to push down the index level, thereby moving prices in a manner favorable to their pre-established option positions. This strategy created artificial price movements that allowed Jane Street to influence the closing levels of key indices, affecting the pricing of related options.
For instance, on January 17, 2024, Jane Street purchased Rs 4,370 crore worth of Bank Nifty futures and sold Rs 32,115 crore worth of options in the morning, then offloaded Rs 5,372 crore futures later, ending with a huge short position in options. This maneuver reportedly earned them Rs 735 crore in options profits despite some losses in futures, resulting in a net gain of Rs 673.4 crore on that single day alone.
SEBI concluded that this intraday manipulation scheme, particularly on expiry days, was aimed at rigging the market to unfairly earn unlawful profits totaling Rs 4,843 crore (about $567 million). Despite prior warnings from the National Stock Exchange (NSE) and assurances from Jane Street to comply with regulations, the firm continued its manipulative activities, leading SEBI to issue an immediate ban and freeze their gains.
The banned subsidiaries are JSI Investments Pvt Ltd, JSI2 Investments Pvt Ltd, Jane Street Singapore Pte Ltd, and Jane Street Asia Trading Ltd. SEBI's whole-time member Ananth Narayan wrote in the order that Jane Street's "egregious behaviour" shows that the firm is not a trustworthy actor, and that the integrity of the market cannot be held hostage to the firm's machinations.
During the same period, the JS Group's Foreign Portfolio Investors (FPIs) were holding on average Rs 15,325 crore of Indian government securities, which served as necessary and essential cash-equivalent liquid margin for them to trade in F&O markets to the extent that they did. However, SEBI's investigation found that Jane Street's trades were unlike various FPIs, as the group primarily invested in index options and had a sharp contrast in holdings between the equity segment and government securities.
The regulator found that Jane Street's actions were intended to mislead, entice, or cause loss to the participants in the index options markets, so that the JS Group could benefit illegally from the even larger positions they were creating or carrying in index options. The gains impounded by SEBI total over Rs 4,843 crore, or about $567 million.
This ban marks a significant step by SEBI to maintain the integrity of Indian stock markets and deter such manipulative activities in the future. It serves as a reminder to all market participants of the importance of adhering to regulatory norms and maintaining the trust of the market.
In light of the evidence, Jane Street had been utilizing their business strategies in finance and investing, specifically in the stock-market and index manipulation, to generate unlawful profits, as shown by their maneuvers on January 17, 2024, which involved investing heavily in Bank Nifty futures and options. This scheme, aimed at rigging the market, was a significant threat to the integrity of the Indian business world, as highlighted by the Securities and Exchange Board of India (SEBI) when they barred four of Jane Street's subsidiaries from trading in Indian markets.
