Insight: How India struggled to regulate Jane Street's money-spinning machine

Reuters

2 days ago

MUMBAI, Aug 14 (Reuters) - More than four months before India's market regulator began formally investigating Jane Street for manipulation in April 2024, it received information from the country's top stock exchange indicating unusual activity by the U.S. trading giant, according to three people familiar with the matter.
The National Stock Exchange (NSE) told Reuters that it had provided the Securities and Exchange Board of India (SEBI) "data and analysis on Jane Street as a consumer" beginning in November 2023. NSE did not provide more details, but the information sharing - which came amid a separate preliminary probe by SEBI into Jane Street's derivatives trading - began due to a surveillance alert, the people said.
SEBI, which had launched its informal investigation in the second half of 2023, quickly found itself challenged by the voluminous and complex data generated by the high-frequency trader's activities in India, two of the people said.
In the months between the preliminary examination and the start of a formal investigation, mom-and-pop traders were bleeding cash: Retail investors lost $21 billion trading derivatives over a period of three years to March 2024, according to SEBI data.
Reuters interviewed eight people familiar with the probe, including market sources and regulatory and exchange officials. They described how SEBI struggled to respond to the explosion of derivatives trading in India - the world's largest options market as of 2023 - and how its dual obligations to police the market and develop India's financial system deterred it from quicker, bolder action.
The news agency is also reporting for the first time details about SEBI's preliminary investigation, which came as retail traders were driving the derivatives boom, with low-income investors accounting for 76% of such trades in the year to March 2024.
Before starting its informal examination,
SEBI had through its market surveillance detected abnormal patterns in some of Jane Street's trades, said two of the people, who like many others interviewed for this story spoke on condition of anonymity to discuss sensitive matters.
The regulator was concerned about the rush of less sophisticated investors into the options market, but it also did "not want to become a nanny state," the people said. SEBI at that time shied away from action that it feared might spook markets, like imposing a minimum income threshold for individuals to trade derivatives, they said.
Instead, SEBI preferred to warn retail investors of the risks: In May 2023, for instance, it asked brokers to display on their trading platforms a warning that the vast majority of individual equities options traders made net losses.
SEBI cracked down in July 2025, when it issued a 105-page interim order barring Jane Street from the local market, in one of the strongest actions it has taken against a foreign investor.
Jane Street made $4.23 billion trading Indian derivatives between January 2023 and March 2025, according to the regulator, which alleges that $567 million of the profits were "unlawful gains."
The regulator did not respond to Reuters' questions about the time taken to launch a formal probe, but its July 4 order noted that Jane Street executed its trades using entities in different geographical locations.
That practice, which is unusual in India, added to the complexity of the investigation, SEBI has said. In some cases, regulators in other major markets have taken as long as two years to complete complex investigations into suspected market manipulation or insider trading.
In Jane Street's case, SEBI likely faced the challenge of distinguishing between aggressive trading and manipulative behavior, said former SEBI official Sumit Agrawal, now managing partner of law firm Regstreet.
If its orders were challenged in court, it faced the high bar of proving "not just impact, but intent," said Agrawal, who left SEBI in 2016.
Jane Street, which denies the charges, says it was merely exercising "basic index arbitrage trading." It has deposited the $567 million of contested profits into an escrow account to regain access to Indian markets, even as it reserves the right to challenge the order.
A company spokesperson told Reuters that Jane Street maintained its books and records in India and believed it was fully compliant with Indian law. Despite having regained the right to trade in India, the firm isn't currently doing so, the spokesperson said.
India's derivatives market is moderating, Ananth Narayan, who led SEBI's Jane Street probe, said on July 17. He attributed the slowdown in part to cooling measures, which SEBI started rolling out in late 2024 that targeted retail investors, such as increasing the minimum size of contracts.
Jane Street's Indian operations took place amid the unbridled post-pandemic growth of derivatives trading.
The notional value of derivatives traded in India in 2023 was 422 times the value of the cash market. In most other global markets at that time, derivatives traded at between five and 15 times cash value.
In this volatile environment, Jane Street accumulated large volumes of the constituent stocks of an index of Indian banks in cash and futures markets, pushing index prices higher, according to the SEBI order. In the mornings of days it engaged in such trades, it also used derivatives to short the index, the regulator said.
Later on such days, the firm then sold the shares in cash and futures markets, SEBI said. Such was the size of Jane Street's positions that it pushed down the price of the index, thereby profiting from the shorts, the regulator said.
The alleged manipulation resulted "in massive profits for the manipulators, at the cost of other participants and retail traders," SEBI said.
Index-based derivatives grew exponentially without sufficient guardrails, said G. Mahalingam, who served as a top SEBI official until 2021. "This led the markets to go into unfettered speculation."
NSE, the host of the index traded by Jane Street, thrived as derivatives boomed in India.
It reported 135 billion rupees in transaction fees for its latest fiscal year, up 32% from the year to March 2023. Seventy-six percent of the transaction fees it charges are related to options trading, its latest financial statements show.
NSE made efforts to encourage trading, like setting up a group composed of exchange officials and executives of high-frequency trading firms, according to two people familiar with the matter.
The firms use derivatives as a major part of their strategy and could raise their concerns during meetings, the people said. The group hosted meetings like one on Oct. 25, 2024 that was attended by one of Jane Street's India top executives, according to minutes of the conversation seen by Reuters.
At that meeting, the group discussed NSE's plans to increase co-location capacity, allowing high-frequency traders to place their computers closer to exchange systems to cut trade execution times.
"It is estimated to triple the rack space in the next 2 years as NSE embarks on providing the necessary infrastructure to support growth," the document said.
By the October meeting, NSE was aware that Jane Street was under the regulatory spotlight. It had been directed by SEBI two months before the meeting to scrutinize Jane Street's trades, according to the July 2025 order, alongside having shared the firm's data with the regulator for almost a year.
A NSE spokesperson told Reuters that in addition to sharing data, it started issuing "detailed surveillance inputs" on Jane Street's activity in April 2024.
When asked why it hosted the meeting with Jane Street despite SEBI's concerns, the spokesperson said NSE "interacts with all market participants ... to address queries and issues within regulatory boundaries."
The exchange had no jurisdiction to take action against investors, the spokesperson added.
Jane Street continues to walk a tight-rope, with tax authorities reviewing documents across its local offices, Reuters reported on July 31.
Some retail traders, however, feel that SEBI didn't go far enough in its crackdown. Mumbai cab driver Govind Jha, 33, said he stopped putting money into derivatives for a month out of frustration that Jane Street had regained its ability to trade.
"How do I make money in such a market?" he said.