After being accused by the market watchdog of manipulating index prices to increase profits at the expense of small investors, Jane Street, a US-based trading firm, found itself at the focus of a regulatory maelstrom in India.
SEBI Accuses Jane Street of Index Price Manipulation
The company was temporarily prohibited from engaging in its securities markets by the Securities and Exchange Board of India (SEBI) on July 3. According to the regulator, Jane Street engaged in a concerted trading strategy that manipulated prices in the Bank Nifty index of India, deceiving investors and making money off of the ensuing volatility.
Jane Street, which has denied any wrongdoing, is now contesting the ruling. It has returned to trading in the Indian market and placed about INR 4,800 crore, or around $560 million, into an escrow account. A discussion between legal arbitrage and criminal market manipulation has been sparked by the case, which has left some institutional investors uneasy and may possibly act as a bigger wake-up call for India’s financial industry.
Jane Street’s Global Operations and Indian Footprint
Jane Street is a global quantitative trading company that trades quickly and across markets using mathematical models and algorithms. It is one of the biggest companies on Wall Street, with operations in over 45 countries and more than 3,000 people.
The company was a major player in the Indian cash market, where investors purchase and sell real shares, as well as the derivatives market, where traders wager on future price changes using tools like options and futures.
What Is Arbitrage? And Why SEBI Objects
A legitimate trading tactic that capitalises on price variations across markets is arbitrage. This implies that a trader can purchase low in one market and sell high in another if a stock is selling at slightly different prices on two exchanges. Arbitrage between the cash and derivatives markets is common in India, where traders can buy and sell related assets at the same time to lock in modest, low-risk gains. In India, arbitrage is permitted as long as the trades are founded on current inefficiencies and don’t aim to inflate prices.
According to V. Raghunathan, a former member of the SEBI main market board, arbitrage may even be advantageous since it can help align prices, increasing market efficiency, as he told CNBC. It is against the law to manipulate the market. It entails purposefully manipulating prices or fabricating a false sense of market activity.
This could involve strategies like manipulating pricing without a sound economic justification, boosting demand artificially, or making trades only to affect market results.
How ‘Marking the Close’ Triggered SEBI Action?
SEBI claims that Jane Street implemented a coordinated trading strategy in the Bank Nifty index by using a number of organisations. According to the market regulator, the index price increased as a result of one company purchasing substantial amounts of banking stocks early in the morning.
In anticipation of a decline in the index, a different business simultaneously entered bets in the futures market. Jane Street is accused of selling off the previous stock purchases in huge quantities around the end of the trading day, especially on expiry days when derivative contracts are paid, which caused the index to decline.
According to Sebi, the firm’s wagers on declining prices were more profitable as a result of this price decline. “Marking the close” is the term for this tactic, which is deemed manipulative if it entails purposefully affecting prices in the last minutes of trading.
According to Sebi, Jane Street’s conduct produced a false and deceptive impression of market activity, which led to distorted trading levels and losses for individual investors. Jane Street has called its activities “basic index arbitrage” and denied any manipulation.
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