India’s Derivatives Market Turmoil: Regulatory Risks for Global HFT Firms

India’s derivatives market has long been a magnet for high-frequency trading (HFT) firms, drawn by its massive retail participation, low minimum trade sizes, and high liquidity. However, the Securities and Exchange Board of India (SEBI)’s aggressive enforcement actions in 2025—most notably its crackdown on U.S.-based HFT giant Jane Street—have exposed the growing regulatory and operational risks for global algorithmic traders in this critical emerging market.

Regulatory Risks: A New Era of Scrutiny

SEBI’s July 2025 interim order against Jane Street, which accused the firm of manipulating the Bank Nifty index through a dual-phase trading strategy, marks a watershed moment. According to a report by Bloomberg, the regulator alleged that Jane Street executed large-volume buy orders in Bank Nifty components in the morning and reversed them in the afternoon to depress the index, profiting from options positions while incurring minimal losses in cash and futures [4]. This “extended marking the close” strategy, as SEBI termed it, led to a $89 million profit on a single day despite a $7.5 million loss in other instruments [2].

The case has triggered a regulatory overhaul. Effective October 1, 2025, SEBI imposed stricter intraday position caps for index options (₹50 billion net and ₹100 billion gross) and mandated random compliance checks via four snapshots per trading day, including peak hours [1]. These measures, as noted by Reuters, aim to curb manipulative practices but also raise operational costs for HFT firms, particularly those relying on rapid, large-scale position adjustments [3].

Operational Challenges: Infrastructure and Market Microstructure

Beyond regulatory risks, India’s derivatives market presents operational hurdles. The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) have seen HFT-driven liquidity improvements, including narrower bid-ask spreads and faster execution times [5]. However, the same technological advantages that enable HFT—such as co-location of servers near exchange infrastructure—also create vulnerabilities. For instance, low liquidity in certain segments allows large players to influence prices, as highlighted in a LinkedIn analysis of the Jane Street case [2].

Moreover, the weekly expiry cycle for derivatives contracts has become a focal point for volatility. As Bloomberg explains, the compressed time window for price discovery during expiry days creates opportunities for manipulation, particularly when HFT strategies exploit informational asymmetries [4]. This dynamic was central to SEBI’s case against Jane Street, which argued that the firm’s actions distorted settlement prices to benefit its options positions [6].

Comparative Context: Emerging Markets and the HFT Dilemma

India’s regulatory approach mirrors broader trends in emerging markets, where regulators are grappling with balancing innovation and market integrity. In Brazil, for example, HFT firms face a 9.3% CAGR growth forecast from 2025 to 2030, but compliance costs are rising due to stricter surveillance and reporting requirements [7]. Similarly, China’s China Securities Regulatory Commission (CSRC) has proposed provisional regulations for programmatic trading, emphasizing standardized definitions for “high-frequency trading” and “abnormal behaviors” while allowing a nine-month adjustment period for market participants [8].

Implications for Global HFT Firms

The Jane Street case underscores that India’s derivatives market is no longer a low-regulation haven for HFT. Firms must now navigate a landscape where algorithmic strategies are scrutinized not just for outcomes but for their processes. As noted in a Market Report Analytics analysis, the ban led to a 20% drop in F&O volumes, signaling that HFT’s liquidity-providing role is both valuable and precarious [3].

For global firms, the lesson is clear: operational resilience and regulatory agility are paramount. Citadel Securities, for instance, has continued to expand in India despite the turmoil, leveraging its technological edge to adapt to evolving rules [2]. Yet smaller players may struggle with the compliance burden, as highlighted by Reuters’ analysis of rising exit rates among niche HFT participants [3].

Conclusion

India’s derivatives market remains a strategic asset for HFT firms, but the regulatory environment has shifted. The Jane Street case has set a precedent for how regulators in emerging markets will evaluate algorithmic strategies—prioritizing transparency, fairness, and systemic stability. As SEBI tightens its grip, global HFT firms must weigh the rewards of India’s vast market against the risks of a rapidly evolving regulatory framework.

Source:
[1] India markets regulator issues new rules for monitoring intraday derivative positions [https://www.reuters.com/sustainability/boards-policy-regulation/india-markets-regulator-issues-new-rules-monitoring-intraday-derivative-2025-09-02/]
[2] SEBI's Sensational Crackdown on Jane Street: Allegations [https://www.linkedin.com/pulse/sebis-sensational-crackdown-jane-street-allegations-ravichandran-ujm9c]
[3] SEBI's Jane Street Ban: Just One Piece of the F&O Liquidity Puzzle [https://www.marketreportanalytics.com/news/article/sebis-jane-street-ban-just-one-piece-of-the-fo-liquidity-puzzle-3-key-factors-driving-derivative-market-volatility-76492]
[4] Jane Street's Cash Machine Comes to an Abrupt Halt in India [https://www.bloomberg.com/news/features/2025-07-06/india-gets-tough-on-high-frequency-trading-with-jane-street-crackdown]
[5] Impact of HFT in enhancing market efficiency [https://www.bajajbroking.in/blog/impact-of-high-frequency-trading-on-market-efficiency]
[6] Expiry Day and the Governance of Algorithmic Trading [https://www.ecgi.global/publications/blog/expiry-day-and-the-governance-of-algorithmic-trading-the-jane-street-episode]
[7] Brazil High Frequency Trading Model Systems (Strategic) Market Analysis [https://www.linkedin.com/pulse/brazil-high-frequency-trading-model-systems-strategic-k8pff/]
[8] FIA responds to CSRC consultation on programme trading in the futures market [https://www.fia.org/fia/articles/fia-responds-csrc-consultation-programme-trading-futures-market]