Sebi likely to probe if Jane Street violated index position limits in F&O segment

India’s markets regulator is enhancing its surveillance to scrutinize manipulation in derivatives trading, its chairman said on Monday.

Capital market regulator Sebi is likely to investigate not only the alleged manipulation in indices trading, but also if the Jane Street Group violated position limits prescribed for equity indices Futures & Options (F&O) segment, Moneycontrol has learnt.

The net limit prescribed as per Sebi circular was Rs 500 crore per Index, but the regulator is investigating if the net limit was breached. Sebi’s findings suggest that there were days when the position in Bank Nifty was more than Rs 50,000 crore. “Jane Street was running Rs 50,000 crore of Bank Nifty positions over a course of time. Sebi is analysing the data, as such acts will be against the spirit of regulation,” said one source. It is due to such huge positions taken by the Jane Street Group that Sebi grew suspicious and started analysing the data, which led to the whole investigation and the subsequent interim order. Read More

Another source explained how such positions can be against the spirit of the law. “Suppose a trader runs Rs 50,000 crore of Bank Nifty position ‘At the Money’ Calls, and then takes a Rs 50,000 crore of completely ‘Out of the Money’ Calls. The net of the two positions will be zero. But the actual delta will be Rs 25,000 crore, which is 50 times of the net position limit prescribed as per the earlier circular, and completely against the intent of the circular”.

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To deal with such issues, from July 1, Sebi has tweaked the way of measuring Open Interest (OI) limit and also the index positions limits have been revised. The OI is now being measured in terms of Future Equivalent basis and the revised position limit is Net End of the day OI limit for options to be Rs 1,500 crore and gross OI is Rs 10,000 crore. Sebi has also come up with tight monitoring mechanism to ensure that no one manipulates the market.

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Sebi in a reply to Moneycontrol query said, “As with all SEBI’s orders, the July 3rd order is a speaking order that clearly lays out SEBI’s prima facie case and addresses all relevant areas and questions. At this stage, we have nothing to add to what is already contained, explained, and reasoned in that order.”

In an interim order dated July 3, Sebi whole-time member Ananth Narayan barred Jane Street Group from accessing the market on the allegations of manipulation in indices. Sebi directed impounding of Rs 4843.5 crore of alleged illegal gains from the select trades that had been investigated. Sebi also directed debit freeze on bank accounts of the Jane Street Group.

Sebi has alleged that Jane Street was manipulating on Bank Nifty and Nifty indices using multiple strategies like taking bullish positions in cash and futures in indices or constituents in the morning to give a false sense to investors, and then taking huge bearish positions in the afternoon. It also applied ‘marking the close’ strategy and placing large and aggressive buy or sell orders near the end of the trading session so the closing price of a stock or index can be influenced.

On July 4, Jane Street had disputed the findings of the Sebi order. Email sent separately to Jane Street seeking response on the possible violations did not elicit any response till the time of publishing the story.