Sebi’s Jane Street crackdown triggers global rethink on India's trading structures

Sebi issued an interim order against Jane Street on July 3.

A market manipulation case against US firm Jane Street by the Securities and Exchange Board of India (Sebi) has set off alarm bells in global high-frequency trading (HFT) firms operating in India.

The July 3 interim order,  one of Sebi’s most aggressive actions against an overseas trading firm, has thrown the spotlight on a common playbook used by some of Wall Street’s biggest players in India.

Several global HFT heavyweights, including Citadel Securities, IMC Financial Markets and Jump Trading, are known to operate through a similar dual-entity model.

Typically, these firms route some of the capital through FPI structures registered in tax-efficient jurisdictions such as Singapore or Hong Kong, while also running a domestic trading desk under an Indian-registered entity.

At the centre of the controversy is Sebi’s finding that Jane Street used a domestic arm — JSI Investments Pvt Ltd — to bypass restrictions placed on foreign portfolio investors (FPIs), particularly around intraday and derivatives trading.

Sebi has directed impounding of Rs 4,843 crore in alleged illegal gains, calling the trading pattern “manipulative” and structurally designed to avoid regulatory scrutiny.

“It appears that the incorporation of the JSI Investments Private Limited (Jane Street) in India enabled the JS Group to work around the regulatory prohibition in FPI Regulations against FPIs undertaking intraday cash market transactions, and thereby execute the manipulative scheme without specifically flouting the FPI Regulations,” Sebi said in the July 3 order.

The market regulator found that Jane Street’s Indian and foreign entities, though legally separate, were under common control and placed opposing trades in the same securities.

The algo play

While placing contra orders by different legal entities isn’t explicitly illegal, Sebi’s order said the coordinated positioning amounted to market manipulation when seen in the context of common ownership and algorithmic execution.

This interpretation has left other HFT firms uneasy. “Some brokers will now have to rework their algorithms to ensure there’s no overlap or contradiction within the group,” said a person familiar with the matter. “This is especially important in illiquid counters, where any form of intra-group activity can create distortion.”

Much of the complexity stems from the highly automated nature of modern trading. More than 99 percent of trades executed by these firms are handled by algorithms with little or no human oversight.

“Each algo operates on its own logic and parameters. Even within the same group, the Indian and foreign entities could end up taking opposite positions, purely based on how their respective models react to market signals,” said a second person with direct knowledge of the matter.

Booming derivatives market

India’s booming derivatives market— one of the largest in the world by volume — has long attracted sophisticated global players despite tax disadvantages.

FPIs from treaty nations such as Singapore enjoy exemptions on profits in the F&O segment, while domestic entities pay 10–15 percent on derivative gains. That tax arbitrage, coupled with regulatory asymmetries, has contributed to the rise of dual-entity models.

Sebi’s order does not name other firms and emails sent to Citadel, Jump, and IMC by Moneycontrol remained unanswered. Moneycontrol could not ascertain which entities would be impacted due to Sebi’s observations.

“Citadel does have dual-entity model with FPI license and domestic trading member license. However, majority of the trades placed by the firm are routed through its on shore entity based out of Gurugram office.” Said a person familiar to the development.

Insiders, however, say the regulator’s stance may force a wider rethink. Courts will likely be called upon to interpret whether such structures violate securities law or whether it was the intent and execution — as in the Jane Street case — that crossed the line.

For now, the signal is loud and clear: India’s market watchdog is willing to go after even the most sophisticated global trading firms if it suspects the system is being gamed.