MC EXCLUSIVE Wall Street firm Jane Street faces NSE probe for certain F&O trades

NSE is probing certain trades made by Jane Street.

Jane Street, the global behemoth in proprietary trades involved in transactions worth trillions of dollars, is facing a probe by the National Stock Exchange (NSE) regarding some of its derivative market trades in India, people with direct knowledge of the matter have told Moneycontrol.

Jane Street Singapore Pte, a registered Foreign Portfolio Investor (FPI) in India, is facing the probe along with the custodian of the fund.

NSE’s surveillance systems red-flagged certain derivative market trades of Jane Street, which were matched and reversed with the same counterparties, the sources cited above said.

In other words, the fund reversed its trading positions in a very short span of time at prices significantly above or below the previous price.

The NSE sent a notice to the custodian bank of the foreign fund in January. In response, the custodian bank and Jane Street said the trades in question were machine based with no human intervention. Hence, the bank and Jane Street have taken a view that there was no malafide intent behind the trades.

The NSE is the first level regulator for the stock market and has powers to issue orders against trading members, custodians and other registered participants.

“All the big F&O players have multiple AI models which use different criteria to make trades. Sometimes, two different AI models make take a conflicting view of the same situation and there are also times when the same algo suggests two different trades base on micro-second level movement in the counter,”  one of the sources said. “Not just Jane Street, there are three-four other FPIs who have received similar notices and they are in the process of replying.”

Emails sent to NSE and Jane Street remained unanswered.

The development comes at a time when Jane Street’s India operations have been booming, with its funds taking significant exposure to Indian derivative markets.

In April 2024, Jane Street accused two former traders of the firm — Doug Schadewald and Daniel Spottiswood — of stealing “immensely valuable” strategy investment from Jane Street, a Bloomberg report said.

Jane Street Capital made headlines in 2021 when the London-based Financial Times reported how the then little-known Wall-Street firm had traded in $17 trillion worth of securities in 2020. The report added that Jane Street managed $8 trillion in exchange traded fund (ETF) assets worldwide with a special focus on bond ETFs.

The development comes as foreign funds, especially those focused on trading, have been betting heavily on India’s futures & options market. These funds are emerging as counterparties to Indian domestic traders, who have also started taking a fancy to derivatives. Some of these funds also take opposite positions in cash and derivative markets.

The increased frenzy in the derivatives market forced the Securities and Exchange Board of India (Sebi) to tighten the rules in November 2024. Under the new rules, the contract size for index futures and options was increased to Rs 15 lakh from Rs 5-10 lakh earlier.

The market regulator announced a set of six measures, including increasing the contract size for index futures and index options to Rs 15 lakh from between Rs 5 lakh and Rs 10 lakh, and rationalisation of weekly index derivatives products by allowing each exchange to provide a contract for only one of its benchmark indices with weekly expiry. Sebi also enhanced margin requirements and introduced intra-day position monitoring to keep the F&O markets in check.