Jane Street case spurs calls for tighter market surveillance in India

Balwani adds that the question here is not just of Jane Street but that any big player can use a similar strategy to access the market. “The bigger question for Sebi is how to ensure similar incidents do not happen again,” he says.

According to him, regulatory oversight is essential to ensure a level playing field and to keep manipulative players under check. But it calls for a fine balance as free markets and regulatory control do not go hand in hand. “Higher regulatory control and stricter measures will only ensure that the market depth falls—this is against free markets and would make it easier to manipulate,” he explains.

The market regulator had, earlier, barred Jane Street Group companies from accessing Indian securities with a seizure order of ₹4,844 crore estimated as ‘unlawful gains’ earned by the group from the alleged violations.

Impact on regulations

Chakravarty says the Jane Street incident presents India with a useful learning experience in managing the emerging market risk. “Sebi has been, till now, in the forefront of protecting retail investors. This episode may prompt further improvements in market-wide surveillance and early warning systems. It reiterates that one needs to develop paradigms that are capable of pre-empting such advanced techniques without curbing innovation,” he says.

He further emphasises that the scenario may prompt a review of the monitoring mechanisms, especially within the high-frequency and options-driven markets. “With the market growing more intricate, adaptive regulatory tools and structures will assist in anticipating aberrant activity,” he says. However, he also adds that tightening alone might not be as effective as a blend of strengthened data analytics, behavioural analysis, and joint discussion with market players.

Also read: Jane Street toes Sebi line, deposits Rs 4,844 crore in escrow

According to the Sebi order, between January 2023 and March 2025, Jane Street made a profit of ₹43,289.33 crore from Index Options alone, “undertaking an intentional, well-planned, and sinister scheme and artifice to manipulate the cash and futures markets…”

Asish Saha, professor emeritus, Ramcharan School of Leadership, MIT World Peace University (MIT-WPU), says the shallowness of the Indian stock markets makes them vulnerable to manipulation. “The challenge of the regulator is to make the regulatory framework, including the feedback and monitoring mechanism, forward looking,” he further says. Saha adds that regulation is primarily aimed at fostering, not stifling, the healthy growth of the stock market by setting the rules of the game and ensuring its adherence in a transparent manner.

According to Saha, accidents will continue to happen as India graduates to become one of the key movers in the world economy, “but a balanced and coherent fabric of regulation, which is based on a robust analysis of events, is needed as is the recalibration of the regulatory mechanism to minimise the scope of possible errant behaviour”, he says.

In a press statement on July 21, Sebi said that stock exchanges will have to monitor and ensure that JS Group entities do not directly or indirectly indulge in any kind of manipulative activity Image: Indranil Aditya / Nurphoto via Getty Images

Gullible retail investors

Despite investor protection measures, retail investors are the most gullible in the derivatives markets. In the last few years, Sebi has introduced various mechanisms and measures in the segment to safeguard investors and clamp down on risky retail participation.

Last October, the market regulator rolled out six measures to curb the rising volume in the derivatives segment. Some of the measures included the reduction in weekly expiries per exchange from five to just one, the increase in lot size to ₹15-20 lakh from ₹5-10 lakh, and the removal of calendar spread benefit on expiry day.

 “With most Indian institutional players not very active in the derivatives market, except for hedging purposes, the only counterforce is the retail investors,” says Balwani. Retail investors were playing for small speculative gains, which were countered by Jane, taking and reversing large positions in the Index derivatives.

Jane Street had reportedly rejected Sebi’s allegations informing its employees that it will contest the ban, stating it was “beyond disappointed” by the “extremely inflammatory” accusations.

 “Taking and reversing positions is not a regulatory violation, which is what Jane is pointing to. But taking simultaneous offsetting positions in spot and derivatives of a single index and reversing them later at scale is not hedging by any sense of the word, more like manipulation,” Balwani explains.

According to a study released by Sebi on July 7, at the aggregate level, nearly 91 percent of individual traders incurred net losses in the equity derivatives segment (EDS) in FY25. The losses widened by 41 percent to ₹1,05,603 crore in FY25 from ₹74,812 crore in FY24 (after accounting for transaction costs). The number of unique individual traders in EDS declined to around 42.7 lakh in the fourth quarter of FY25 from around 61.4 lakh in the first three months of the fiscal.

During the first three quarters of FY25, the aggregate net losses across individual traders and the average net loss per person were rising. However, in the fourth quarter, there was a reduction in losses of individual traders—both at the aggregate as well as per person level.

Balwani explains that gullible retail investors, who end up with steep losses, are not investors but speculators. They are playing in derivatives, which even seasoned players use very judiciously, if at all. “If you use derivatives for speculation, you need to be aware of the downside as well, which is why they are only recommended for hedging,” he says.

Therefore, Balwani recommends that more institutional investor participation in the derivatives market is essential to ensure market depth, but there is no way retail speculators would be able to make money from speculative derivatives positions, unless they possess the necessary knowledge and expertise.  

Arbitrage & manipulation

The Jane Street incident has also sparked a debate on the difference of arbitrage and manipulation of trades in the derivatives markets.

Index arbitrage is legal, but exploiting the limitation in the composition of the stocks in Bank Nifty index, with uneven weightage in terms of market capitalisation in its composition and the timing of the trades, is not an acceptable ethical standard in stock market operations, says Saha.

According to Investopedia, arbitrage is the financial equivalent of bargain hunting on a grand scale, with traders and investors constantly searching for opportunities—using the latest algorithms and fastest internet speeds to act in microseconds—to buy low in one market and sell higher in another. Whereas market manipulation is meant to deceive investors by controlling or artificially affecting the price of securities. The latter is illegal in most cases.

There is a very fine line between arbitrage and manipulation. Balwani says that big players can take positions in markets by moving stocks or indexes in one direction to inflate options premiums, and then move them in the opposite direction to collapse them, profiting from retail investors’ losses. “While we could argue that this is arbitrage, as you are making a position in one derivative which is counter to position in spot and futures, the question is of intent. And the intent is deliberate movement of spot and futures to move option premiums, which is not arbitrage,” he says.

Chakravarty also agrees that differentiating between manipulation and arbitrage frequently is a matter of intent, effect, and context. In high frequency regimes, in which trades congregate around anticipated regions, interpretation is likely to be subtle. “While certain techniques would take advantage of inefficiencies, continuous evaluation of their overall market impact assists authorities and players in agreeing on what is fair play,” he says.