The National Stock Exchange (NSE) has sent notices to at least three Hong Kong-based hedge funds on trades undertaken in the Indian derivatives market, sources told Moneycontrol. They spoke on condition of anonymity given the sensitivity of the matter.
The funds which received notices include Sebes Befut Ltd, a category II foreign portfolio investor (FPI), the sources said. The identity of the other two funds could not be ascertained immediately.
Stock exchanges are the first-level regulators in the Indian market and are required to monitor transactions of brokers, mutual funds and FPIs among others.
In the case of Sebes Befut, the NSE observed that the fund reversed its trading positions in a very short span of time at prices significantly above or below the previous trade price, the sources said.
In the case of the other two foreign funds, it is suspected that they engaged in synchronised trades where the orders were placed in advance to be executed at a specific time, the sources said.
An email sent to NSE remained unanswered, while Sebes Befut could not be reached for comments.
“All the three funds have responded to NSE’s notices and have told the exchange that these were machine-driven trades with no human intervention. The cases are in progress,” one of the sources cited above said.
“Algos use different sets of data to arrive at their own conclusions on viable strategies, and hence, it is unlikely that there was any malice intended.”
Also read: Wild Nifty swings on weekly expiry day spark chatter of manipulation by HFT cartel
A growing market
The development assumes significance as foreign funds are taking massive bets in the Indian derivatives market, often playing the role of a counterparty to the domestic retail traders.
The ongoing lawsuit between Jane Street – a UK-based proprietary trader with $62 billion worth of assets – and Millennium Management brought forth new insights into how FPIs are reaping substantial profits from the Indian derivatives market through their trading models.
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Jane Street sued Millennium Management and its former traders for allegedly stealing secret trading strategies pertaining to Nifty Options.
According to a Bloomberg report, Jane Street made $1 billion profit in 2023 alone because of the strategy deployed by it.
Industry watchers say Hong Kong, as a jurisdiction, allows such hedge funds far more flexibility than some other countries. “In particular, there is a lot of focus from global regulators on Hong Kong-based funds; there have been proceedings in the US, UK and Singapore against some such funds,” another person cited above said.
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