India regulator investigates derivative trades by Jane Street over three-year period, sources reveal

India’s financial markets regulator is delving into Jane Street’s derivative trading activities over the past three years, suspecting the quant trading giant of potential manipulation of India’s benchmark stock market indexes, sources revealed. The investigation marks the most extensive probe into a global trading firm and comes amid efforts by the Securities and Exchange Board of India (SEBI) to temper the fervor in India’s derivative markets.

SEBI’s inquiry targets Jane Street, along with its subsidiaries, Jane Street Singapore Pte and JSI Investments, concentrating on the firms’ employment of algorithmic trading techniques in the National Stock Exchange’s top 50 stock index and banking stock index. The objective is to ascertain whether there was a recurrent pattern of amassing substantial derivative positions in index constituents, particularly banking stocks, followed by trading the index in the physical market to capitalize on its holdings.

In India, there are no restrictions on traders assuming intraday positions in both derivative and physical markets. Nonetheless, surveillance mechanisms typically alert regulators to repeated occurrences of positions exceeding 10 billion Indian rupees ($116.93 million). A report, aided by the stock exchange, is being compiled. Following this, a regulatory notice will be sent to the U.S.-based firm, requesting an explanation for its trading practices. The sources, choosing to remain anonymous due to the confidential nature of the investigations, disclosed that Jane Street and SEBI have not responded to numerous requests for comments.

The bedrock of the investigation lies in the substantial profits reaped by Jane Street from its derivative positions in India – nearly five times higher than the second-largest trading entity. Renowned for its high-frequency trading and dominance in the exchange-traded funds market, Jane Street’s net trading revenue for 2024 tallied at $20.5 billion worldwide, as reported by Bloomberg. By December 2024, the firm’s revenue from its Indian operations hit 200 billion Indian rupees ($2.34 billion). The inception of its India operations dates back to December 2020.

Additional complaints from prominent institutional firms about Jane Street’s trading activities catalyzed the regulatory inquiry. Noteworthy is a past legal tussle between Jane Street and Millennium Management, a rival hedge fund. The lawsuit, settled in December, involved allegations of the theft of a crucial in-house trading strategy that included India options and yielded $1 billion in profits for Jane Street in 2023.

The heightened scrutiny arising from the investigation has induced SEBI to bolster monitoring of intraday positions, scrutinizing large concentrated trades in index stocks. SEBI and stock exchanges are currently devising a system to detect such trades, with consecutive days of large positions potentially triggering further investigation. The parameters for such investigations are still in the works. In addition, exchanges will be mandated to periodically audit the algo programs of major trading entities. These firms are already obliged to obtain approval from exchanges before implementing their programs.