SEBI Bans Jane Street Group From Indian Market Over Alleged Index Manipulation

India's Securities and Exchange Board (SEBI) has taken a significant regulatory step by imposing a temporary ban on Jane Street Group LLC, a U.S.-based investment firm, from accessing the local securities market. This action follows an extensive investigation into alleged manipulation of index derivatives, specifically targeting the Nifty and Bank Nifty indices. SEBI has accused Jane Street of artificially inflating stock prices to gain from options trading, resulting in unlawful profits estimated at approximately INR 48.4 billion (US$556.7 million).

The interim order issued by SEBI restricts Jane Street and its affiliated entities from engaging in any securities transactions, either directly or indirectly, until further notice. The regulator has also frozen the alleged unlawful gains, mandating Jane Street to deposit the funds in an escrow account at a Scheduled Commercial Bank in India. Additionally, any open positions in exchange-traded derivatives contracts must be closed within three months or at expiry.

SEBI's investigation uncovered that Jane Street had disregarded a caution letter issued by the National Stock Exchange in February. This letter advised against taking large cash-equivalent positions and using certain trading patterns. Despite this warning, Jane Street continued to maintain very large cash-equivalent positions in index options, particularly on expiry days. The regulator identified abnormally high or low volatility on weekly index options expiry days and noted that certain entities, including Jane Street, were running large cash-equivalent risks.

The investigation, which analyzed 18 trading days, found evidence of an intraday index manipulation strategy employed by Jane Street. On three of those days, evidence of extending the market close was reported. In one instance, on January 17, 2024, Jane Street's actions pushed up the BANKNIFTY index prices, allowing the firm to build large short positions. These positions were then reversed and sold, pushing down the index and producing larger options positions and profits that offset intraday cash and futures trading losses.

SEBI's order highlights that Jane Street's strategy of taking very large trading market share facilitated price manipulation. The regulator noted that while dealing in multiple segments across cash equities, stock futures, index futures, and index options is not inherently a breach of regulations, the intensity and scale of Jane Street's intervention in the underlying component stock and futures markets, along with the rapid reversal of large and aggressive trading without any plausible economic rationale, indicated manipulative behavior.

Jane Street has disputed the findings of the SEBI interim order and has committed to engaging further with the regulator. The firm stated that it is committed to operating in compliance with all regulations in the regions it operates. This ban marks one of the strictest actions taken by SEBI against a foreign firm, underscoring the regulator's commitment to maintaining market integrity and preventing manipulative practices.

SEBI's action against Jane Street marks a significant regulatory intervention, highlighting India's stance on protecting market integrity. The fallout primarily affects traditional securities, yet showcases cross-border regulatory capabilities. The financial implications are considerable with $580 million earned illicitly, showcasing regulatory challenges in detecting sophisticated trading exploits. This case could prompt tighter control over foreign players.

While India's securities sector takes a decisive stand, ongoing scrutiny may reformulate global trading practices. The event could reshape regulatory policies for international investors, emphasizing enhanced oversight measures. The enforcement underscores regulatory vigilance in international investment compliance, serving as a warning to foreign institutional investors regarding compliance expectations in India.