SEBI’s expiry-day clampdown: Can it curb alleged Jane Street-style manipulation?

Unless there is a mechanism for the exchanges to track group exposures in real time, they will be ineffective in calling out rogue trades.

The Securities and Exchange Board of India’s (Sebi) plan to impose penalties for intraday position breaches on expiry days could put large algo funds and prop desk on the guard, but will not be adequate to meaningfully curb the “Jane Street–style” alleged manipulation that triggered regulatory scrutiny, traders say.

As Moneycontrol reported on August 19, Sebi is weighing a new framework under which intraday position limits will be raised to Rs 5,000 crore net delta (from Rs 1,500 crore), while the gross cap remains at Rs 10,000 crore. Breaches on expiry days could invite financial penalties, whereas on non-expiry days they would only trigger surveillance. Currently, Sebi has not formally defined intraday limits, though exchanges are advised to monitor the same thresholds through the session.

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Market participants say penalties will certainly make prop desks cautious about their trades on expiry days because of heightened surveillance, yet they may not be effective in preventing manipulation. They cite two main reasons. First, limits apply to a single PAN. Large proprietary desks already split trades across multiple accounts to remain below thresholds. Second, surveillance lacks tools to track exposures of entities acting in concert — the very issue raised in Sebi’s allegations against Jane Street.

Unless there is a mechanism for the exchanges to track group exposures in real time, they will be ineffective in calling out rogue trades. While no single prop desk in India currently has the kind of capital that could move markets like Jane Street did, a similar effect could be achieved with large prop desks acting in concert.

Currently, Gross Future Equivalent (FutEq) OI for a single PAN is capped at Rs 10,000 crore. It would cost about Rs 80–240 crore in premium to buy ATM options or about Rs 3,000–4,000 crore to sell options to hit the gross position limit of Rs 10,000 crore. If, while selling options, insurance legs are added, margin requirements reduce by around one-third. The popular strategy of selling a plain straddle with insurance (short iron butterfly) would require capital (margin requirement) of roughly Rs 1,200 crore, according to rough calculations by veteran trader Santosh Pasi. This is fairly sizable for a single entity – not because the capital is huge but the risk it entails is not since options are being sold.

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So while much of the traded volume will remain intact, curtailing the real risk of manipulation will require tracking group exposures in real-time. Even then, it may be a challenge to figure out manipulation if traders/large prop desks are acting in concert to steer trades to their benefit.