SEBI prohibits Jane Street Group from Indian market for alleged index manipulation

India’s securities watchdog, the Securities and Exchange Board (SEBI), has recently made a bold move by temporarily banning U.S.-based investment firm Jane Street Group LLC from participating in the Indian securities market. This decision comes after a thorough investigation into alleged misconduct related to the manipulation of index derivatives, particularly focusing on the Nifty and Bank Nifty indices. SEBI has accused Jane Street of artificially inflating stock prices to profit from options trading, resulting in an estimated illegal gain of around INR 48.4 billion (US$556.7 million).

In response to these allegations, SEBI issued an interim order prohibiting Jane Street and its related entities from conducting any securities transactions, whether directly or indirectly, until further notice. Moreover, to prevent any disposal of the alleged unlawful gains, the regulator has instructed Jane Street to deposit these funds into an escrow account at a designated Scheduled Commercial Bank in India. Additionally, any outstanding positions in exchange-traded derivatives contracts must be liquidated within three months or upon expiration.

SEBI’s investigation revealed that Jane Street had ignored a cautionary letter issued by the National Stock Exchange in February. This letter advised against maintaining large cash-equivalent positions and engaging in specific trading practices. Despite receiving this warning, Jane Street persisted in holding substantial cash-equivalent positions in index options, particularly on expiration days. The regulator identified unusual volatility levels on weekly index options expiration days and observed that certain entities, including Jane Street, were taking substantial cash-equivalent risks.

During an examination of 18 trading days, SEBI uncovered evidence of an intraday manipulation strategy employed by Jane Street. On three of these days, anomalies in the market closing were noted. For example, on January 17, 2024, Jane Street’s actions led to a significant increase in BANKNIFTY index prices, allowing the firm to establish substantial short positions. These positions were subsequently liquidated, driving down the index values and generating significant profits that offset intraday trading losses.

SEBI’s directives underscore that Jane Street’s strategy of capturing a significant market share facilitated market manipulation. While engaging in various market segments is not inherently problematic, the regulator highlighted the unusual intensity and scale of Jane Street’s activities in the underlying stock and futures markets, coupled with abrupt and sizable trading reversals lacking clear economic rationale, as indicators of manipulative conduct.

In response to SEBI’s interim order, Jane Street has refuted the accusations and expressed a commitment to engaging further with the regulator. The firm emphasized its dedication to compliance with regulatory norms in all jurisdictions where it operates. This ban constitutes a severe measure by SEBI against a foreign entity, reinforcing the regulator’s dedication to upholding market integrity and deterring manipulative behaviors.

SEBI’s actions against Jane Street emphasize India’s resolve to safeguard market integrity. While the consequences of the ban predominantly impact traditional securities, they also shine a light on the potential regulatory implications across borders. With substantial illicit profits of $580 million, this case underscores the challenges in identifying and addressing sophisticated trading malpractices, potentially paving the way for stricter oversight of foreign entities.

As India’s securities sector takes a strong stance, continual scrutiny may lead to redefining global trading practices. This event has the potential to reshape regulatory frameworks for international investors, stressing the importance of heightened oversight measures. The enforcement actions signal regulatory vigilance concerning compliance with international investment standards, serving as a cautionary tale for foreign investors regarding expectations of adherence to Indian regulations.