Large HFT traders Jane Street, Jump, Graviton, arbitrage MFs to feel the pinch of STT hike

HFT Traders and Arbitrage Mutual Funds

• Government hikes STT rates for derivatives, impacting HFTs and mutual funds
• STT on futures raised to 0.05%, options premium to 0.15%, exercise to 0.125%
• Experts warn liquidity may drop and arbitrage fund returns could decline

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Several large high frequency traders(HFTs) such as Jane Street, Jump Trading, Graviton Capital and AlphaGrep Securities, along with large mutual fund houses like Kotak MF, ICICI Pru MF, SBI MF and HDFC are expected to face higher tax out go as the government hiked the Securities Transaction Tax (STT) rates applicable for derivative market transactions. Market experts say, this hike in STT rate is a headwind for markets and may squeeze the liquidity in the F&O market.

In the Budget for FY2026-27, finance minister Nirmala Sitharaman announced that the STT rate on futures is being raised from 0.02 percent to 0.05 percent. Further, STT on options premium has been raised from 0.1 percent to 0.15 percent, while STT on exercise of options will be taxed at 0.125 percent against 0.1 percent currently.

HFT firms, arbitrage funds hit hardest  

While the large HFT firms use algos to make massive trades in F&O, arbitrage funds generally shift between cash and F&O market to make a small profit. Both the entities make frequent trades in F&O market and hence will be most impacted by the STT hike, say experts.

“HFT traders work on absolute margins with each individual trade trying to capture a tiny or fixed price difference. The hike in STT will impact them a lot. But it's not just FIIs doing HFT trades, this also significantly impacts domestic investors in arbitrage funds, which have become famous in recent years. These funds typically buy in cash markets and sell futures. They churn their portfolio quite a lot on contract expiries, so this will impact their returns,” said a stock market investor, speaking on the condition of anonymity.

“These funds have been delivering between 8.5 percent to 10.5 percent percent, with the STT hike those numbers will come down,” he added. Arbitrage funds currently manage assets worth approximately Rs 4-4.5 lakh crore, he added.

Emails sent to Jane Street, Jump Trading, Gravitron, AlphaGrep, HDFC MF, Kotak MF and SBI MF had not elicited a response at the time of publishing.

Chintan Haria, Principal Investment Strategy, ICICI Prudential AMC told Moneycontrol that increased cost of transaction may weigh on arbitrage fund returns, given the need to roll over futures positions every month.

"However, these funds still remain a viable parking avenue for investors with an investment horizon of over six months," he added.

In a note, Edelweiss AMC said that arbitrage funds may see some impact on returns, but a part of the increased cost can be mitigated by the fund manager with lower churn between contract expiries.

Raamdeo Agrawal, Chairman & Co-founder, Motilal Oswal Financial Services commented that the STT hike and the removal of dividend set-offs seem to be bringing a headwind to markets.

“They make many high-frequency and arbitrage trades unviable, which will squeeze market liquidity and leverage in the short term,” he said.

To understand the rise in STT consider the following example: currently for every Rs 1 crore worth of futures sold, a trader pays Rs 1,250 as STT which will now be Rs 2,000. Similarly, for an option sale contract of Rs 1 lakh the STT increases from Rs 1,00,000 to Rs 6,25,000.

“The proposed taxation on F&O is expected to raise transaction costs across the derivatives market, affecting individual investors as well as institutional participants such as AMCs, corporate hedgers, and portfolio managers who rely on these instruments for hedging and risk management. While the intent is to curb excessive speculation, the lack of distinction between risk-management-driven participation and speculative activity remains a key policy consideration,” said Ashish Singhal, Co-founder, Lemonn.

The rise in the STT rates comes after various regulators including the Reserve Bank of India(RBI) and the Securities and Exchange Board of India(Sebi) in the past have expressed concerns over surge in F&O volumes, especially the increasing craze amongst retail investors. In a market study released on July 7,2025, Sebi said over 91 percent of retail investors who traded in F&O market in FY25 made losses. The total loss made by retail investors in FY25 was Rs 1.06 lakh crore while each trader on an average made a loss of Rs 1.1 lakh crore during the fiscal, data showed.