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

Indian tax authorities and market regulator are considering widening their probe of United States trading giant Jane Street Group to investigate it for tax evasion in addition to an earlier charge of price rigging in the Bombay Stock Exchange’s benchmark Sensex, according to media reports.

The tax evasion charge comes on the heels of market regulator, the Securities and Exchange Board of India (SEBI), seizing 48.43 billion rupees ($570m) and banning four Jane Street-related entities from operating in the market for alleged price manipulation in the National Stock Exchange (NSE).

SEBI’s order has roiled the Indian markets, raising questions about regulator surveillance and investor protection in the world’s largest options trading market. Trading in India’s weekly equity index options has slumped by a third on the ban on Jane Street, the Reuters news agency reported on Thursday.

Trading of equity options lets investors buy or sell a stock at a predetermined price and date. As the Indian market rapidly grew to handle more than half of all global options trades, retail investors entered the market too.

Questions of price manipulation have dogged this rapid rise but remained vacuous until a New York court case in April 2024, where Jane Street alleged that its rival, Millennium Partners, had stolen its algorithms that helped it make in the Indian options market. A whistleblower, Mayank Bansal, then made presentations to SEBI showing Jane Street’s trading patterns. Bansal had agreed to speak to Al Jazeera about his interaction with SEBI on the matter, but then backtracked.

On July 3, in a detailed interim order, the regulator said that “by preponderance of probability, there is no economic rationale that can account for this sudden burst of large and aggressive activity … other than the intent to manipulate the price of securities and index benchmark”.

SEBI has alleged that Jane Street accumulated large long positions in stocks that are a part of the NSE’s Bank Index and built large short positions in index options at the start of trade. Around market closing time, it would reverse its trades in the cash and futures segments, pushing down the index and earning large profits in the options segment.

This activity was blurred by its offshore entities making some of these trades.

“Lawyers [can] push back with SEBI on jurisdiction-related issues, but when underlying [Indian] securities are issued, SEBI can take action,” Joby Mathew, managing partner at the law firm Joby Mathew and Associates and a former legal officer at SEBI, told Al Jazeera.

Jane Street has disputed SEBI’s findings and has hired lawyers to represent it before SEBI in the case. It has deposited the 48.43 billion rupees ($563m) of allegedly ill-gotten gains in an account pending the investigation and final report.

“Such processes typically take eight to 24 months,” especially in “complex manipulation cases”, Sumit Agarwal, a former SEBI officer and cofounder of Regstreet Law Advisors, told Al Jazeera in an emailed response.

But the investigation can only be part of a broader questioning of Jane Street and the regulator’s role in identifying and curbing such trades sooner and protecting retail investors.

‘Highly speculative and volatile’

As India’s options market grew, retail investors were drawn to it, enticed by the growing volumes, the prospect of quick gains and less fettered trades than the equities market, where a rapidly rising stock could hit circuit breakers, leading to a halt in trading to prevent manipulation.

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

Mathew says his clients from the options trading segment range from students to award-winning cardiologists who may not have a refined knowledge of the market but were sold on the idea by traders or social media influencers. Most ended up losing money.

Deven Choksey, managing director at the Mumbai-based stock brokerage KR Choksey Shares and Securities, says retail investors form nearly half the Indian options market, while Jane Street and other sophisticated institutions form a little more. “It’s like a bullock cart facing a race car. Their meeting is bound to cause accidents.”

If Jane Street is found to have manipulated the market, its earnings would have come through losses for retail investors.

Bhargavi Zaveri, a financial regulations researcher formerly at the National Institute of Public Finance and Policy and currently a doctoral researcher at the National University of Singapore, says retail investors have made losses in the options segment, but the total amount is not clear.

Identifying and compensating investors can be hard in such cases. So even if the final order goes against Jane Street and the 48.43 billion rupees fine goes into an investor protection fund, it may be hard to distribute it onwards to retail investors who incurred losses. The best protection may be to stem irregular trades early, experts say.

“SEBI has a surveillance system and they can well monitor the markets in a timely way.,” says Choksey.

SEBI’s interim order is based on trades made by Jane Street between January 1, 2023 and March 31, 2025, a period in which retail investors may have incurred substantial losses, going by SEBI’s estimates.

Regstreet’s Agarwal says, “SEBI’s own 2024 consultations flagged expiry day options as highly speculative and volatile.”

India has fortnightly expiry dates for options, which is when they have to be settled. That is when Jane Street allegedly manipulated prices.

In a February 6 letter, SEBI told Jane Street, “The above trading activity prima facie appears to be fraudulent and manipulative.” But it did not issue its order curbing Jane Street until July 3.

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

But the best way to protect retail investors would be to have them trade separately from proprietary trading firms in the options segment, Choksey points out.

“India is unique … and in no market will you see so many retail investors. So, SEBI must create product differentiation by customer segment.” to protect retail investors Chiksey says.

Challenges in proving manipulation

In an internal email, Jane Street reportedly told employees it was using “basic index arbitrage trading” and called SEBI’s allegations “extremely inflammatory”. It has hired Mumbai-based law firm, Khaitan and Co, to represent it before SEBI.

Proving price manipulation involves showing intent, which can be hard, and experts are divided on whether a SEBI investigation will be able to demonstrate that. “Trading to incur losses makes no sense, and so it indicates manipulation,” says Mathew, the former legal officer.

But NUS’s Zaveri says it is not so clear. “I think three problems are being conflated here. One, the size of the options segment being manifold the underlying cash segment. Two, that retail investors have made losses on the options segment, which I’m not sure have been quantified. Three, Jane Street arbitraged between an illiquid cash and highly liquid options segment.”

According to her, the three occurrences may not prove the intent to manipulate.

Under Indian law, proving manipulation is challenging and “Jane Street can argue its expiry day trades were legitimate index arbitrage recognised by regulators, making a manipulation finding difficult without clear intent evidence,” Regstreet’s Agarwal says.

Any action by SEBI could affect Jane Street’s reputation. Last month, an investigation by Bloomberg found that Jane Street cofounder Robert Granieri was duped into funding weapons for an attempted coup to overthrow the government in South Sudan.

If SEBI’s final order lays out any action against Jane Street, “they may well have to disclose it in their filings, which will affect them elsewhere in the world”, says Mathew.