Zerodha CEO's Remarks Following SEBI's Decision to Ban Jane Street from Indian Stock Markets
The Securities and Exchange Board of India (SEBI) has taken a strong stance against US-based trading giant Jane Street, accusing the firm of manipulating the Bank Nifty index using complex intra-day strategies. This action has sparked concerns from Indian industry leaders, such as Zerodha co-founder and CEO Nithin Kamath, who praised the move but warned of potential risks for both exchanges and brokers.
The case against Jane Street underscores the notable differences between the Indian and US securities markets, particularly in terms of regulation and market practices. While the US market tends to be more flexible and risk-tolerant, the Indian market prioritises market integrity and investor protection through enforcement and transparency, with less tolerance for opaque practices.
In the US, dark pools—private trading venues where orders are not displayed publicly—are common and play a significant role in liquidity provision. However, they have drawn scrutiny for risks of reduced market transparency and potential conflicts of interest. In contrast, dark pools have been less prominent and are more tightly controlled in the Indian market. SEBI’s focus on better enforcement of existing regulations rather than creating new rules suggests a cautious approach.
Payment for order flow (PFOF) is a common practice in the US where brokers receive compensation for directing orders to specific market makers or venues. This has been controversial for potential conflicts of interest but remains legal under SEC rules with certain disclosures. In India, PFOF is generally not permitted or widely practiced due to regulatory focus on protecting retail investors and maintaining market integrity.
SEBI's handling of the Jane Street case demonstrates its commitment to transparency, promoter disclosures, and preventing market manipulation. The regulator has restrained the firm and impounded unlawful gains from derivative trades to prevent market manipulation. Companies in India are also required to demonstrate three years of profits before listing, fostering market stability and discouraging high-risk speculative practices.
Proprietary trading firms, such as Jane Street, contribute nearly 50% of India's options trading volumes. If these firms were to pull back due to SEBI's crackdown, retail participation could also be affected. Retail participation in India's options trading makes up about 35%. The potential withdrawal of proprietary trading firms could impact the Indian market significantly, and the severity of the potential impact is yet to be fully understood.
The next few days will be crucial in understanding how dependent the Indian market is on large prop trading firms, with F&O volumes set to reveal the extent to which the Indian market is reliant on these prop trading giants. The impact on the Indian market, particularly in terms of F&O volumes, remains to be seen in the coming days.
**Table:**
| Aspect | Indian Securities Market (SEBI) | US Securities Market (SEC) | |----------------------|-------------------------------------------------|----------------------------------------------| | Regulatory Focus | Strong enforcement of existing rules; transparency; stability | Flexibility; innovation; allowing riskier listings | | Dark Pools | Limited use; tightly controlled; focus on transparency | Common; significant liquidity role; regulatory scrutiny ongoing | | Payment for Order Flow | Generally not permitted; regulated to protect investors | Permitted with disclosure; controversial practice |
The issue with Jane Street illustrates the contrasting focuses between Indian and US securities markets, with the former prioritizing transparency, market integrity, and investor protection over the US's preference for flexibility, innovation, and risk tolerance.
In the Indian market, dark pools are less prevalent and more tightly controlled, unlike in the US where they contribute significantly to liquidity provision but have received scrutiny for reduced transparency and potential conflicts of interest.
