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Are we ready to handle market manipulations in electricity derivatives?
The Jane Street case: A wake-up call
The JSG case exposed classic intraday manipulation. The group purchased large volumes of BANKNIFTY index and constituent stocks early in the trading day, driving prices upward. Concurrently, it took reverse positions in the options market. Later, they offloaded their holdings, pulling down prices and reaping disproportionate profits in the derivative segment, while absorbing manageable losses in the cash market.
This trading pattern, which came to light through a US court case in April 2024, evaded Sebi and exchange surveillance for over 15 months until interim orders were finally issued on July 3, 2025. Notably, the detection did not stem from domestic oversight but through disclosures in litigation abroad.
Sebi's timeline illustrates the vulnerability of surveillance systems, even when both cash and derivative markets are governed by the same regulator (Sebi) and the exchange ecosystem is tightly knit (NSE). The strategy deployed by JSG hinged on exploiting illiquidity in the cash segment and leveraging high liquidity in derivatives—particularly BANKNIFTY options around expiry periods.
Electricity spot markets: The challenge of dual regulation
The electricity market, structured differently, introduces additional layers of complexity. Three power exchanges—Indian Energy Exchange (IEX), Power Exchange India Limited (PXIL), and Hindustan Power Exchange (HPX) — serve primarily the Day Ahead Market (DAM) and Real-Time Market (RTM). IEX dominates both, handling roughly 3.9 per cent and 2.47 per cent of national generation respectively, amounting to just 7 GW and 4.8 GW in traded capacity. These figures do not reflect a truly liquid market.
Further complicating matters, derivative contracts will be settled at prices derived from IEX and PXIL — despite PXIL's minimal volumes. In contrast to equities, where Sebi governs both segments, electricity markets have split jurisdiction: the Central Electricity Regulatory Commission (Cerc) oversees spot contracts, while Sebi regulates derivatives.
Some of the large power generators individually control substantial capacity. As such, their ability to influence prices in illiquid markets is undeniable, especially since comprehensive trade disclosures aren't mandated under current protocols.
Launch of electricity derivatives: Regulatory coordination is key
With derivative contracts having debuted on MCX (July 10, 2025) and set to debut on NSE (July 14, 2025), regulatory silos present risks. While volume caps have been prescribed to prevent distortions, these are not fail-proof. Coordination between Sebi and Cerc must be seamless. Miscommunication or lag in action could have ripple effects — raising costs for electricity consumers and undermining market integrity.
The JSG episode underscores the need for real-time surveillance, rapid response frameworks, and clear inter-regulatory protocols. If Sebi's mechanisms struggled with manipulations in tightly monitored equity markets, can the electricity sector — divided between two regulators — claim immunity?
Time to ringfence and reform
India's electricity derivative market is at a formative stage. This moment demands a forward-looking approach. Regulators must not only anticipate the nature of manipulative strategies but act decisively to prevent their execution. Surveillance infrastructure must be upgraded, communication lines clarified, and cross-market behaviour monitored in tandem.
Regulatory failures in one segment must not cascade into others. It is imperative for Sebi and Cerc to insulate their constituencies, proactively guard consumer interests, and evolve with the market. While early action may have been missed, the JSG case offers a chance to set the ball rolling before it's too late.
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