Jane Street’s 'illegal' strategy made other algo firms wary of taking positions on expiry days, say experts

SEBI found a repeated pattern in the trades and alleged that these were not normal trades but were manipulation and against the SEBI Prohibition of Fraudulent and Unfair Trade Practice (PFUTP) Regulation.

The strongly-worded order by the Securities and Exchange Board of India (SEBI) against high frequency trading firm Jane Street has sent a strong signal to all such firms that had actually made trading a difficult proposition for many entities, especially on the day of expiry, said market participants.

They add that ever since there were murmurs of Jane Street deploying an “illegal” and “manipulative” trading strategy in the derivatives segment, many other firms and even individual traders were sceptical about taking positions in the segment and stayed away especially on the day of expiry when the traction should have been the highest.

“The strategy of Jane Street was such that there would be sudden sharp movements in the prices and that would catch the traders and other firms completely unaware,” said the head of a large HFT firm based in Gurugram.

“Sudden triggering of stop losses had become a common occurrence and it basically wiped out the other players in the arena. Given their deep pockets and the strategy, they were able to manipulate the options prices in a big way and that made other players actually scared. In options, your fortunes can change in seconds,” he added, wishing not to be named due to the sensitivity of the matter.

Also Read: Jane Street leveraged India entity to breach FPI rules, powering trading strategy for alleged illicit gains

According to the Sebi order, Jane Street used to heavily buy Bank Nifty futures as well as its constituents in the cash segment and sell Bank Nifty options in big numbers -- all in the morning of expiry days. After noon, company's related entities used to aggressively sell large amounts in Bank Nifty futures.

Further, SEBI found a repeated pattern in the trades and alleged that these were not normal trades but were manipulation and against the SEBI Prohibition of Fraudulent and Unfair Trade Practice (PFUTP) Regulation.

Also Read: How Jane Street allegedly manipulated index closing on expiry days

Meanwhile, according to a CEO of a broking firm that specialises in algo trading, the SEBI order has sent a strong signal to all such firms that bend the rules to make extra profits while making it tough for genuine market participants.

“This is a strong signal from SEBI. Whether the regulator is able to get the ill-gotten gains is secondary. The fact that it acted and passed an order is a huge step. Sebi order against Jane Street has sent a strong signal to all algo traders that bend rules to make an extra buck,” he said on conditions of anonymity.

“This is an important order also because of the fact that Jane Street is not the only one though it is the biggest. This order would help instil confidence amongst the trading community,” he added.

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