Jane Street Vs SEBI: 'Arbitrage' Defence Contests Regulator's 'Manipulation' Allegation

On Jan. 17, 2024, during the opening minutes of trade, the NSE Nifty Bank Index dropped sharply — falling over 3% within eight minutes. While media reports attributed the slide to HDFC Bank Ltd.’s earnings a day earlier, India’s capital markets regulator pointed to something else.

In an interim order, the Securities and Exchange Board of India accused global trading firm Jane Street of deliberately manipulating the index through a series of trades that it said lacked “plausible economic rationale.” SEBI called it a case of “intra-day index manipulation,” flagging what it described as aggressive, unhedged positions in Nifty Bank options and other instruments that were rapidly built up and unwound between 09:15 and 09:22:59 that morning.

Jane Street strongly rejected the accusation. In an internal note to staff viewed by NDTV Profit, the firm said SEBI had misunderstood its index arbitrage strategy and that its trades were consistent with efforts to close a pricing gap between the Nifty Bank’s options and its underlying constituents.

The markets regulator case focused on Jane Street’s trades around At-the-Money (ATM) options — contracts closest to the index’s value and most sensitive to price movements. The firm reportedly built a large negative delta exposure, a position that gains as the index falls. It then reversed the exposure after the fall, booking profits in a short span.

SEBI said the trades extended beyond normal arbitrage. “Such conduct — repeatedly entering and squaring off positions with no legitimate hedge — disturbs the sanctity of the derivatives market,” the order said. It added that the scale and speed of the trades stood out, even in an algorithm-driven market.

Jane Street’s activity spanned across index options, Nifty Bank futures, stock futures, and cash equities of HDFC Bank Ltd., Kotak Mahindra Bank Ltd., ICICI Bank Ltd., Axis Bank Ltd., State Bank of India, and IndusInd Bank — six stocks that together make up 87.67% of Nifty Bank Index.

Jane Street, in its response, said the regulator failed to account for how arbitrage works across markets. “We reject the premise and the substance of the order in the strongest possible terms,” the firm told employees.

It said its trades aimed to profit from a mispricing between Nifty Bank’s options and the index value derived from the underlying stocks. The note included a graph showing a divergence between options-implied index levels and stock-based index prices at the open on Jan. 17.

“We traded in a direction consistent with closing that gap,” the firm said. “We believe the trading activity shown here is unambiguously good for the health of financial markets.”

SEBI pointed to a spike in Jane Street’s gross trading value on the day. The firm’s GTV was five times higher than on Jan. 16 and four times more than on Jan. 18. The regulator said this pattern also appeared on 14 other occasions.

It clarified that multi-segment trading was not itself the problem. Rather, it was the pattern of building and closing exposures aggressively in a matter of minutes that raised red flags.

In a separate section, SEBI focussed on Jane Street’s trades during weekly expiry sessions—specifically on July 10, 2024 and two other expiry days. The concern here was “marking the close,” a practice where trades near market close may influence the settlement price of options.

Between 14:30 and 15:30 on those days, Jane Street’s trades spiked again. SEBI said this may have influenced the Nifty Bank’s closing price, thereby affecting expiry values for a large number of options held by retail investors.

The regulator cited data showing that 93% of more than one crore retail F&O traders lost money between April 2021 and March 2024 and said that such behaviour by institutional players might worsen outcomes for small investors.

Jane Street rejected SEBI’s expiry-day concern. It said rolling over delta exposure — shifting risk from expiring options to longer-dated ones — is standard market practice globally.

“Participants who provide liquidity accumulate stock price exposure that ceases to exist at the point of options expiration,” it said. “Replacing expiring deltas with non-expiring deltas is a standard and well-understood practice.”

SEBI’s order also described Jane Street as “non-cooperative.” But the firm disputed that claim. It said it met with the National Stock Exchange and BSE in February 2024 and shared additional details with SEBI in August.

“Since February, we have made ongoing efforts to communicate with SEBI and have been consistently rebuffed,” Jane Street told employees.

It also questioned the timing of the order, saying it came months after it had engaged with the exchanges and updated its practices.

SEBI’s interim order barred Jane Street’s India units from the market and directed the firm to deposit Rs 4,843.57 crore in an escrow account. It noted that the investigation is ongoing and that further action could follow.

Jane Street said it would respond in full and explore legal options. For now, the episode marks one of the sharpest public clashes between a global trading firm and India’s markets regulator—built around seven minutes of trading that set off a regulatory standoff.