The interim order issued by SEBI on July 3 is merely a cease-and-desist directive, giving Jane Street an opportunity to explain the trading strategies that led SEBI to infer manipulative intent. This is expected to be followed by additional orders highlighting possible manipulation in other index derivatives before the regulator moves toward issuing a final order, sources said.
SEBI so far has investigated only Bank Nifty and trades of Nifty. As per one source, the regulator is further investigating the trades of Jane Street group in indices like Sensex, Fin Nifty, Bankex, Nifty IT Index, Nifty Midcap Index and other stock options to ascertain if the alleged manipulation was carried out. SEBI is expected to take around six months to complete the full investigation, as enormous amount of data is to be analysed. Market experts suggested that narrow indices with a smaller number of stocks and illiquid indices are easy to manipulate for deep pocketed traders.
As per SEBI interim order, Jane Street gained Rs 43,289.33 crore in index and stock options, while they net lost Rs 7,208 crore in stock futures, lost Rs 191 crore in index futures, and lost Rs 288 crore in trading in cash equities segment.
SEBI in its order said, “Incurring losses in cash and futures market in a deliberate and systematic manner is itself unusual and indicative of fraud”.
SEBI order noted that the series of trades executed by Jane Street Group demonstrate a pattern which, when viewed in its totality, indicates a prima facie intent to take unfair and undue advantage of the market structure and sentiments prevailing at the time.
SEBI cited the trades of January 17, 2024 on Bank expiry day and said, citing how by manipulating the index on expiry days, large number of participants are likely to have been induced to deal in index options at artificial prices. SEBI order noted that the massive profits by Jane Street Group in index options through egregiously manipulative activities, to the detriment of other participants including many small retail traders, may well account for some part of the conclusions of SEBI’s earlier research report dated September 23, 2024. It revealed that 93% of over 1 crore individual F&O traders incurred losses during the three years from FY22 to FY24.
To reduce the risk of manipulation in indices available for derivative trading, in its circular issued on May 29, SEBI set new norms. As per these norms, eligibility criteria for derivatives on non-benchmark indices will be reviewed and for such indices minimum of 14 constituents to be ensured. Also, the top constituent’s weightage should not be more than 20 percent. Combined weight of the top three constituents should not be higher than 45 per cent. All other constituents of individual weights must be lower than those of the higher-weighted constituents i.e., a descending weight structure should be followed.
On July 3, SEBI whole-time member Ananth Narayan G, passed an interim order against the Jane Street and three other group entities, alleging manipulation in the indices on expiry days. SEBI alleged that Jane Street group to misled the market by taking huge positions in cash and futures market sometimes even in falling market. And then, when market participants were under impression that it will go up, Jane Street used to create huge bearish positions in Bank Nifty and hence made profits. Such positions were created mostly on expiry days.
Though Jane Street group has disputed the SEBIs findings of the interim order.
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