SEBI’s Jane Street ban triggers liquidity concerns in derivative market

Here's why Nithin Kamath says ban on Jane Street 'could be bad news for both exchanges and brokers'

SEBI’s interim order banning global quant firm Jane Street from participating in Indian markets is keeping traders in wait-and-watch mode, with some of them warning a possible hit to liquidity when markets open Monday.

The order — passed at the dawn of July 4 — bars Jane Street and its India arm, JSI Investment Pvt Ltd, from trading in Indian securities, and seeks to impound Rs 4,840 crore in alleged unlawful gains linked to expiry-day manipulation using cash and futures trades to distort options pricing.

While the action has been lauded for reinforcing market integrity, the exit of a key volume provider has left traders concerned about thin liquidity and abrupt shifts in volatility.

“There could be a sudden liquidity crunch as there is disruption of a major volume provider,” said Preeti Chhabra, Independent Derivatives Analyst. “In the longer run, it’s a positive for investor confidence and market oversight, but in the short term, the exit of such large players will be felt.”

Derivative market participants say Jane Street was one of the most active institutional players in weekly options — particularly on expiry days — often trading in thousands of crores and deploying advanced execution strategies. Its sudden absence could impact spreads and volumes.

With Jane Street leading to need for higher scrutiny, many funds are expected to reassess exposure. Some traders say this will force a pullback in far-month and illiquid contracts where exits are harder to manage.

“When large funds take massive positions, especially in far-month or low-volume options, they often influence the price just by entering. But when they try to exit, they face the opposite problem — no counterparty at the inflated price. That’s the liquidity trap. So, traders may now choose to cut back early and reduce exposure before the market turns against them,” said a derivatives analyst.

Expiry-day manipulation in focus

The SEBI order highlights how Jane Street allegedly used its Indian entity to carry out intraday trades in violation of FPI norms, aggressively buying Bank Nifty components in the morning to lift the index, only to reverse positions in the afternoon and profit via large Bank Nifty option exposures.

“This is a welcome move by SEBI. We had flagged these expiry-day distortions earlier,” said Sourabh Sisodiya, Co-founder of Quantify Capital. “A Rs 10 option would suddenly spike to Rs 300 to 400. It wasn’t normal volatility — it was manufactured. Jane Street was clearly one of the biggest players. Many prop traders are relieved,” he added.

The order, though interim in nature, has delivered a clear signal: expiry-day manipulation using brute capital will now face regulatory consequences.

Short-term pain, long-term reset

While most Indian proprietary desks don’t trade at the scale of global funds, their strategies are still influenced by the flows and price distortions caused by such players. Some traders worry that the increased scrutiny could spook even compliant prop desks and algorithmic funds.

“Even funds that haven’t broken rules will now become cautious. Because when global regulators pick this up, it’s not just SEBI anymore. Reputational risk comes into play,” said another.

Over the past year, expiry-linked strategies had become a dominant theme in Indian derivatives. Traders cite a pattern: outsized flows in high-liquidity near-month contracts, and distortion in illiquid far-month contracts — both made profitable by timing, muscle, and precision.

“Markets had gone parabolic. A few large funds became the market itself,” said a senior proprietary trader. “This crackdown changes that. You’ll now see a retreat — and that’s not just caution, that’s survival,” he added.

Zerodha founder Nithin Kamath, in a post on X platform, also flagged the potential liquidity risk, noting that proprietary trading firms like Jane Street account for nearly 50 percent of options trading volumes. “If they pull back — which seems likely — retail activity (~35 percent) could take a hit too. So, this could be bad news for both exchanges and brokers,” he wrote.

SEBI’s broader reforms in context

The Jane Street order comes just weeks after SEBI revamped its expiry calendar, mandating uniform expiry days — Tuesdays for NSE and Thursdays for BSE starting September — to rein in expiry-day crowding and volatility.

Other reforms already in place include delta-based open interest limits, real-time surveillance systems, and tighter rules for options exposures — all designed to protect retail traders and restore fair play.

Even Chhabra added, "With the recent regulatory intervention, there will be cleaner and more structured market in India going forward, the price discovery will be more on real liquidity and cleaner trends. Few trading strategies might go obsolete but would be cleaner market going forward."

Kamath's view on X expects coming days to test just how reliant Indian markets had become on large proprietary players. “F&O volumes might reveal how deep this dependence really runs,” he said.