Jane Street: Questions Linger

For a nation aspiring to be a global economic powerhouse, the integrity of its financial markets is paramount.

The Securities and Exchange Board of India appeared to uphold this principle with its recent, decisive action against Jane Street Group. The American high-frequency trading firm stands accused of audacious market manipulation, with SEBI impounding a record Rs 4,844 crore ($580 million) in alleged illegal profits.

Yet, this laudable strike against a perceived market predator has done little to soothe nerves. Instead, the details of the interim order have peeled back a veneer of regulatory competence to reveal a troubling picture of potential negligence, institutional failure and questionable policymaking at the highest levels.

The order raises immediate and serious questions about the role of the National Stock Exchange, India's largest bourse and its first line of regulatory defence. SEBI's probe was initiated in April 2024, not by its own surveillance, but by media reports of a US lawsuit. It then delegated the initial examination to the NSE. The exchange submitted its report seven months later in November 2024, upon which SEBI's team found a prima facie case of manipulation.

The unavoidable question is: why couldn't the NSE? If the data was clear enough for the regulator, why did the exchange, with its sophisticated surveillance systems, apparently miss it?

Even more perplexing is the NSE's subsequent action or lack thereof. Rather than issuing a standard show-cause notice, the NSE, acting "on instructions of SEBI", sent a mere "caution letter" to Jane Street in February 2025. This is an almost unheard-of response to allegations of this magnitude. It suggests a regulator and an exchange treating a major market player, responsible for a huge slice of trading volumes, with kid gloves.

Such deference raises ugly possibilities, from gross incompetence to a worrying bias or even corruption, designed to protect a lucrative client. Had Jane Street simply ceased its activities after this gentle warning, it might have walked away with its entire fortune, rendering the caution utterly meaningless.

The affair becomes murkier when viewed against the backdrop of regulatory changes pushed through by SEBI's former chairperson, Madhabi Puri Buch. An October 2024 circular, which hiked contract lot sizes and penalised arbitrageurs with higher expiry-day margins, was rammed through despite what sources claim was overwhelming public opposition.

The regulations had the perverse effect of draining liquidity and making life harder for market-stabilising arbitrageurs, while doing little to curb the strategies allegedly employed by Jane Street. A subsequent consultation paper in February 2025 on gross exposure limits was similarly criticised for potentially hobbling domestic firms while leaving loopholes for global giants with complex structures.

The timing and nature of these policies are highly suspect. Were they part of a genuine, if misguided, attempt to protect retail investors? Or were they, as critics now allege, a deliberate or inadvertent cover for the activities of firms like Jane Street?

The allegations that the former chairperson may have misrepresented the volume of public feedback on these controversial rules demand a full and transparent investigation. The very foundation of these regulations — curbing retail losses — now appears fraudulent in light of an order suggesting these losses were engineered by a manipulator.

This scandal exposes deep structural flaws in India's market design. A punitive Securities Transaction Tax on futures has driven a disproportionate amount of activity into the riskier, more complex world of options. This creates a playground for sophisticated players to the detriment of the broader market. Compounding this is a tax regime that gives foreign firms a significant advantage over their domestic counterparts in the derivatives space. These are not market accidents; they are policy choices that have consequences.

Restoring faith requires more than just penalising a single foreign entity. The path forward must be a multi-pronged and unflinching cleanup.

First, the investigation must be widened beyond the Bank Nifty contract to assess the full scale of the manipulation across all index derivatives. Second, an independent and rigorous inquiry into the role of the NSE and the conduct of the former SEBI leadership is not just necessary, but critical for institutional credibility. Any evidence of wrongdoing must be met with severe consequences.

India must undertake urgent structural reforms. This includes rationalising the STT to create a more balanced market and levelling the tax-playing field between foreign and domestic traders. The damaging regulations of October 2024 should be rolled back to restore liquidity and empower arbitrageurs.

SEBI's bold move against Jane Street was a necessary start, but it will be judged a failure if it does not lead to a thorough house-cleaning. India's ambition to attract global capital rests on the promise of a fair, transparent and rigorously policed market. That promise now hangs in the balance.

Rohit Jain is a managing partner and Diviay Chadha is a partner at Singhania & Co.

Disclaimer: The views expressed here are those of the authors and do not necessarily represent the views of NDTV Profit or its editorial team.