India’s ban on Jane Street raises concerns over regulator role

Indian taxation authorities and marketplace regulator are considering widening their probe of United States trading elephantine Jane Street Group to analyse it for taxation evasion successful summation to an earlier complaint of terms rigging successful the Bombay Stock Exchange’s benchmark Sensex, according to media reports.

The taxation evasion complaint comes connected the heels of marketplace regulator, the Securities and Exchange Board of India (SEBI), seizing 48.43 cardinal rupees ($570m) and banning 4 Jane Street-related entities from operating successful the marketplace for alleged terms manipulation successful the National Stock Exchange (NSE).

SEBI’s bid has roiled the Indian markets, raising questions astir regulator surveillance and capitalist extortion successful the world’s largest options trading market. Trading successful India’s play equity scale options has slumped by a 3rd connected the prohibition connected Jane Street, the Reuters quality bureau reported connected Thursday.

Trading of equity options lets investors bargain oregon merchantability a banal astatine a predetermined terms and date. As the Indian marketplace rapidly grew to grip much than fractional of each planetary options trades, retail investors entered the marketplace too.

Questions of terms manipulation person dogged this accelerated emergence but remained vacuous until a New York tribunal lawsuit successful April 2024, wherever Jane Street alleged that its rival, Millennium Partners, had stolen its algorithms that helped it marque successful the Indian options market. A whistleblower, Mayank Bansal, past made presentations to SEBI showing Jane Street’s trading patterns. Bansal had agreed to talk to Al Jazeera astir his enactment with SEBI connected the matter, but past backtracked.

On July 3, successful a elaborate interim order, the regulator said that “by preponderance of probability, determination is nary economical rationale that tin relationship for this abrupt burst of ample and assertive enactment … different than the intent to manipulate the terms of securities and scale benchmark”.

SEBI has alleged that Jane Street accumulated ample agelong positions successful stocks that are a portion of the NSE’s Bank Index and built ample abbreviated positions successful scale options astatine the commencement of trade. Around marketplace closing time, it would reverse its trades successful the currency and futures segments, pushing down the scale and earning ample profits successful the options segment.

This enactment was blurred by its offshore entities making immoderate of these trades.

“Lawyers [can] propulsion backmost with SEBI connected jurisdiction-related issues, but erstwhile underlying [Indian] securities are issued, SEBI tin instrumentality action,” Joby Mathew, managing spouse at the law steadfast Joby Mathew and Associates and a erstwhile ineligible serviceman astatine SEBI, told Al Jazeera.

Jane Street has disputed SEBI’s findings and has hired lawyers to correspond it earlier SEBI successful the case. It has deposited the 48.43 cardinal rupees ($563m) of allegedly ill-gotten gains successful an relationship pending the probe and last report.

“Such processes typically instrumentality 8 to 24 months,” particularly successful “complex manipulation cases”, Sumit Agarwal, a erstwhile SEBI serviceman and cofounder of Regstreet Law Advisors, told Al Jazeera successful an emailed response.

But the probe tin lone beryllium portion of a broader questioning of Jane Street and the regulator’s relation successful identifying and curbing specified trades sooner and protecting retail investors.

‘Highly speculative and volatile’

As India’s options marketplace grew, retail investors were drawn to it, enticed by the increasing volumes, the imaginable of speedy gains and little fettered trades than the equities market, wherever a rapidly rising banal could deed circuit breakers, starring to a halt successful trading to forestall manipulation.

Retail investors were drawn to India’s burgeoning options marketplace [File: Rajanish Kakade/AP Photo]

Mathew says his clients from the options trading conception scope from students to award-winning cardiologists who whitethorn not person a refined cognition of the marketplace but were sold connected the thought by traders oregon societal media influencers. Most ended up losing money.

Deven Choksey, managing manager astatine the Mumbai-based banal brokerage KR Choksey Shares and Securities, says retail investors signifier astir fractional the Indian options market, portion Jane Street and different blase institutions signifier a small more. “It’s similar a bullock cart facing a contention car. Their gathering is bound to origin accidents.”

If Jane Street is recovered to person manipulated the market, its net would person travel done losses for retail investors.

Bhargavi Zaveri, a fiscal regulations researcher formerly astatine the National Institute of Public Finance and Policy and presently a doctoral researcher astatine the National University of Singapore, says retail investors person made losses successful the options segment, but the full magnitude is not clear.

Identifying and compensating investors tin beryllium hard successful specified cases. So adjacent if the last bid goes against Jane Street and the 48.43 cardinal rupees good goes into an capitalist extortion fund, it whitethorn beryllium hard to administer it onwards to retail investors who incurred losses. The champion extortion whitethorn beryllium to stem irregular trades early, experts say.

“SEBI has a surveillance strategy and they tin good show the markets successful a timely way.,” says Choksey.

SEBI’s interim bid is based connected trades made by Jane Street betwixt January 1, 2023 and March 31, 2025, a play successful which retail investors whitethorn person incurred important losses, going by SEBI’s estimates.

Regstreet’s Agarwal says, “SEBI’s ain 2024 consultations flagged expiry time options arsenic highly speculative and volatile.”

India has fortnightly expiry dates for options, which is erstwhile they person to beryllium settled. That is erstwhile Jane Street allegedly manipulated prices.

In a February 6 letter, SEBI told Jane Street, “The supra trading enactment prima facie appears to beryllium fraudulent and manipulative.” But it did not contented its bid curbing Jane Street until July 3.

SEBI’s caller measures limiting play expiries, tightening spreads and higher margins “reflect a propulsion for greater protection” for retail investors, Agarwal says.

But the champion mode to support retail investors would beryllium to person them commercialized separately from proprietary trading firms successful the options segment, Choksey points out.

“India is unsocial … and successful nary marketplace volition you spot truthful galore retail investors. So, SEBI must make merchandise differentiation by lawsuit segment.” to support retail investors Chiksey says.

Challenges successful proving manipulation

In an interior email, Jane Street reportedly told employees it was utilizing “basic scale arbitrage trading” and called SEBI’s allegations “extremely inflammatory”. It has hired Mumbai-based instrumentality firm, Khaitan and Co, to correspond it earlier SEBI.

Proving terms manipulation involves showing intent, which tin beryllium hard, and experts are divided connected whether a SEBI probe volition beryllium capable to show that. “Trading to incur losses makes nary sense, and truthful it indicates manipulation,” says Mathew, the erstwhile ineligible officer.

But NUS’s Zaveri says it is not truthful clear. “I deliberation 3 problems are being conflated here. One, the size of the options conception being manifold the underlying currency segment. Two, that retail investors person made losses connected the options segment, which I’m not definite person been quantified. Three, Jane Street arbitraged betwixt an illiquid currency and highly liquid options segment.”

According to her, the 3 occurrences whitethorn not beryllium the intent to manipulate.

Under Indian law, proving manipulation is challenging and “Jane Street tin reason its expiry time trades were morganatic scale arbitrage recognised by regulators, making a manipulation uncovering hard without wide intent evidence,” Regstreet’s Agarwal says.

Any enactment by SEBI could impact Jane Street’s reputation. Last month, an probe by Bloomberg recovered that Jane Street cofounder Robert Granieri was duped into backing weapons for an attempted coup to overthrow the authorities successful South Sudan.

If SEBI’s last bid lays retired immoderate enactment against Jane Street, “they whitethorn good person to disclose it successful their filings, which volition impact them elsewhere successful the world”, says Mathew.