Global quant trading firm Jane Street may have created a bespoke structure to bypass Indian regulatory restrictions on intraday trading by foreign portfolio investors (FPIs) and profit from what SEBI has called a manipulative trade strategy in the index derivatives market. According to SEBI’s interim order issued on July 4, the firm used its India-based entity, JSI Investments Pvt Ltd, to execute large-scale, same-day trades in the cash market—an activity explicitly prohibited under the FPI regime.
On January 17, 2024, Jane Street is alleged to have orchestrated a complex two-phase trade in Bank Nifty component stocks and futures. In what SEBI labels “Patch I,” the firm aggressively bought shares and futures in the morning session, temporarily pushing the Bank Nifty index higher. Then, during “Patch II” later in the day, it reversed these positions by selling aggressively, dragging the index back down. Despite booking a trading loss of over ₹61.6 crore in the cash and futures segment, SEBI found that the real gains came from the options market.
Also Read | How Jane Street allegedly manipulated index closing on expiry days
The regulator concluded that this trading pattern had no economic rationale when viewed in isolation. The sheer size of the trades, the manner of execution, and the associated transaction costs almost guaranteed a net loss in the underlying market. However, Jane Street simultaneously ran a large options position—selling calls and buying puts in the Bank Nifty index—which benefitted directly from the induced volatility.
Crucially, SEBI noted that the reversal trades in the cash market were conducted through Jane Street’s India-based entity, JSI Investments. This raises regulatory red flags because FPIs are barred from executing intraday trades under the SEBI (FPI) Regulations, 2019. All FPI transactions are required to settle and cannot be squared off within the same trading session.
SEBI’s assessment, made on a “preponderance of probability,” is that Jane Street had full knowledge that it would unwind its morning purchases by day’s end. This premeditated cycle of buying to inflate the index, exploiting the temporary rise in options pricing, and then selling to deflate the index enabled the group to book profits in its derivatives portfolio while leaving other market participants exposed to artificial price signals.
Entities that were active in the Bank Nifty options market during that day—many of whom used the spot level to price their trades—were unaware that the underlying index was being temporarily distorted by one party’s trading actions.
SEBI labelled the trades a textbook case of “marking-the-close,” where an entity with large near-expiry options exposure aggressively moves the underlying market in its favour.
While the July 4 order is an interim cease-and-desist directive, SEBI sources indicate that more detailed enforcement actions may follow, including further findings related to manipulation in other index derivatives and possible disgorgement of unlawful gains.
Jane Street’s estimated ₹15,000 crore margin money, held in government securities, could now come into play as the regulator seeks to recover $560 million in alleged illegal profits.
Sebi’s interim order on Jane Street highlights growing vigilance and ability to uncover sophisticated strategies, especially where inefficiencies may exit and arbitrage is suspected.
Several Indian proprietary traders welcomed the Sebi order. “The among of date crunching Sebi has done is very impressive,” said Santosh Pasi, a veteran trader.
Market veteran Samir Arora said, “This seems to be a clear case of manipulation -- you can not create positions only to create an impact that you will reverse and profit from.” On the question of how sebi’s order will impact FPI perception of India he said, “This is great as no serious player in the market would like to see random movements, leave alone FPIs.
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