As Jane Street, Millennium spar, F&O gurus say quant firms always have the upper hand

F&O experts say that quant firms will always have the upper hand because they use the co-location facility.

The ongoing legal tussle between investment management firms Jane Street Group and Millennium Management Global Investment will not have any implications for the Indian equity derivatives market, irrespective of who emerges victorious, futures and options (F&O) traders told Moneycontrol.

Jane Street has accused two of its former employees of stealing a highly profitable options trading strategy for the Indian market, before joining Millennium.

Read: Jane Street vs Millennium case: What we know so far about their Indian operations

This sparked off a heated debate on social media, with some market experts accusing quantitative/algorithmic trading firms—quant/algo trading firms in market parlance—of misusing their technology firepower to skew the market against retail traders.

Veteran derivatives traders, however, said that retail traders have been at a disadvantage to quant firms for a while now and the legal battle has only reignited the debate.

“The options trading space has become overcrowded post-Covid,” Bandi Shreyas, an independent F&O trader, told Moneycontrol. “As a result, strategies in which the probability of profits were very high are no longer as profitable. Besides the operational risks due to excess congestion on the 0dte (expiry day options) instrument have gone up tremendously,” he said.

Bandi is of the view that there is nothing unfair about the quant firms dominating the options trading scene, unless they were using some strategy that are inherently designed to sabotage the discovery of fair prices.

“Even within retail traders, awareness has increased tremendously in the last few years as there is so much learning material and information publicly available. This is leading to a situation where the casual trader is often up against a better prepared retail investor,” he said.

There have been increasing instances of a sudden spike in options prices on expiry, causing huge losses to a section of traders. Some options traders allege that algo trading firms deploy strategies that trigger sudden bursts of buying or selling, and  force smaller traders to square off or cover their positions at a huge loss.

“These firms (quants) with their super sophisticated systems definitely have an edge,” said Kirubakaran Rajendran, CEO, Squareoffbots.com. “But what these guys trade cannot be replicated by retail because they (retail) lack hi-tech software, and what retail traders trade cannot be replicated by these firms as these trades cannot be done at scale.”

Rajendran feels globally too firms with superior technology almost always win the options trading game. “People always want to put the blame on something or someone for their losses,” he said.

“With the recent spikes (in options prices) and stop losses getting triggered, algo trading firms are being made out to be the villains of the piece,” he said, adding that retail traders serious about options trading should work harder on their risk management strategies, something which most people don’t.

F&O experts say that quant firms will always have the upper hand because they use the co-location facility, a service provided by the exchanges that allows trading members to place their servers right next to the exchange’s order matching engine, giving them a significant speed advantage in executing trades.

“There is nothing unfair or surprising about algo trading firms dominating the game, because they are spending huge sums on technology, infrastructure and talent,” Bandi said.

As options trading volumes in India exploded post-Covid, algo trading firms have made a killing with revenues and profits of many witnessing a three-fold jump in the last three years.

Graviton, QE Securities, Alphagrep Securities, Jump India, Citadel India, HRTI, NK Research, are some of the big names among algo trading firms.

Sarang Sood, independent F&O trader, says there is a general feeling that retail traders are being exploited by the big players, especially foreign firms.

“But it's the same in any business,” he told Moneycontrol. “Big fish eats small fish. I don't think we can stop this,” he said.

The courtroom battle between Jane Street and Millennium Management has revealed that both the players have been making huge profits in India in options trading through specialised strategies.

But Sood feels the latest tirade on social media against foreign quant firms may be misplaced. “If there are lambs waiting to be slaughtered, then if not from outside, someone from within India might find a way to take advantage. We can't fight with these occurrences.”

“At the end of the day, option traders are taking huge risks by trading daily expiries. Someone is just exploiting that greed,” Sood said.