Article #2

Did Jane Street Screw Up The Indian Options Market?

How a Wall Street giant rigged India’s markets—and why SEBI finally struck back

- By Timothy Chummar

One fine morning, SEBI (the Securities and Exchange Board of India) delivered a massive blow to Jane Street, one of the largest quantitative trading firms in the world. They accused Jane Street of market manipulation, banned Jane Street from trading in Indian markets temporarily and even demanded that Jane Street pay fines to the tune of $567M. Where did Jane Street go terribly wrong in dealing with the Indian markets?

Here’s a simple run down of the whole issue:

The whole can of worms opened up when Jane Street sued a rival investment management company, Millennium Management Global Investment and two former employees (Douglas Schadewald & Daniel Spottiswood). Why? The employees developed a trading algorithm for Jane Street, which was initially viewed with skepticism by other Jane Street employees. But when they tested the algorithm in the market, it went wildly beyond expectations. This algorithm earned so much money that Jane Street knew that had to keep it under wraps, which is why they signed a confidential & IP agreement in December 2023.

Despite the agreement, both left and joined Millennium Management and once they joined, Millennium Management started to make lots of profits whilst Jane Street’s profits started to tank, which is why they went to court. But Jane Street was extremely secretive about its ‘insider strategy’ (if you will) and to which country it was being applied to the point where one lawyer stated in a hearing that the algorithm was so profitable that even stating the country could lead others to virtually reverse engineer the investment strategy. But it was too late, because Millennium Management’s lawyers already accidentally revealed the country’s name in previous proceedings: India. The scale at which this operation was happening was enormous. To give context, Jane Street earned $1B from the Indian options market in 2023 alone.

Eventually, both parties settled the case, but it aroused the curiosity of SEBI and they started investigating Jane Street’s operations in India by checking every single trade Jane Street performed in Indian markets.

They started by looking at Jane Street’s trades from January 2023 to March 2025 and came up with two potential strategies that Jane Street used: intraday index manipulation and extended marking the close.

The strategy of primal concern for us is intraday index manipulation. First, which index did they target? The chose ‘BANKNIFTY’, an index that tracks the 12 largest & most liquid banks in the country. It was set up in 2003 as a sort of monitor to track the health of our banking sector. How did they rig the game in their favor? This is where the concept of intraday index manipulation comes into play.

Jane Street’s Indian companies would aggressively buy BANKNIFTY index stocks in the morning, but specifically the top 5 banks. Why? Because the top 5 banks in the index contribute nearly 80% of the volume, if Jane Street trades these stocks at a high volume (with Jane Street’s computational power and sheer volume of money), the entire index can rise or fall. And also, keep in mind that BANKNIFTY is one of the most popular indexes amongst retail traders with nearly 1.6M unique entities being traded in BANKNIFTY index options.

At the same time, the international offices of Jane Street (specifically the Jane Street Asia Trading office in Hong Kong) would bet on the index falling. Specifically, Jane Street’s Indian entities would bet on the cash market that the index would rise whilst the Hong Kong office would bet in the derivatives market that the index would fall. Overall, Jane Street’s employees reasoned that even if they lost in the cash market, they would recoup the money with huge profits in the derivates market.

Here's an example to show how it worked: on January 17th, market sentiment about a top 5 bank in the index (HDFC) was negative as HDFC posted its worst day in nearly 4 years over margin concerns because of which the BANKNIFTY tanked that morning. But between 9 and 12, Jane Street India bought stocks and futures in HDFC’s major rivals worth upwards of $515M which suddenly increased the index’s value. Smaller retail traders assumed that they would ride the wave and put call options on BANKNIFTY stocks, but they didn’t realize that behind the scenes, Jane Street’s Hong Kong office already bet in the options market that the index will fall which is what eventually happened. As soon as the call options started to increase, Jane Street immediately sold the stocks, which tanked the index (remember the volatility factor of the index). Jane Street ran away with millions in profit but left retail traders with heavy losses. In this example, they lost about $22.9M in the cash market but gained nearly $554.7M in the options market.

Why is this critical to India? From what I’ve seen of traders in India, here’s a few reasons as to why Jane Street’s actions severely affect Indian traders:

1) The options market in India is extremely huge. To give you context: in 2019, only 700,000 people traded in options. Today, it’s 10 million. In the US, the share of options trading is 70 percent. In India, it’s 99.6 percent. In most countries, the trading volume of the derivates market is generally 5-15 times the size of the cash market trading volume. In India, it’s 400 times the size of the cash market trading volume with a $1.1 trillion turnover in March 2024.

So, if manipulation were to happen at this scale, it could heavily discourage options traders which would become very detrimental to a major segment of economic activity in India.

2) Most investors in this realm are young investors (aged between 20-30, the figures are 43 percent in 2024 as opposed to 11 percent in 2019). Jane Street’s actions could potentially disincentivize new investors from entering the market if they feel it’s not worth the investment and has a high risk of failure (add in the fact that they know that the scales are tipped in favor of volume traders who have immense computational power and can raise and crash markets at will).

I don’t see that as a strong possibility, but it might gradually erode faith in the stock market and SEBI’s role in regulating large multinational quantitative traders.

3) It might change the power dynamics of the stock market. Before the advent of the internet, stock trading and options trading was only restricted to extremely rich people sitting in offices who had access to stockbrokers. The internet changed all that and every day people could have access to the stock market, and it was perceived in an almost delusional light where you only had to trade stocks to make it big. The stock market became democratized, and it opened the possibilities of making it big in the stock market for everyone.

Now, with Jane Street’s actions, it’s starting to cement the elephant in the room: the true winners of the stock market are people who have access to large sums of money, huge computational power, and access to intelligent math and CS nerds from top colleges.

The stock market is slowly but surely starting to become more oligarchical in nature, with the big IB firms and hedge funds having the last laugh leaving little room to spare for tiny retail investors.

4) What they’re doing is borderline illegal. To back this up, SEBI stated that Jane Street’s actions were manipulative in the fact that Jane Street is moving around pieces in the market to profit from them.

In a truly equal stock market, the price of a share or an option is determined by genuine demand or supply without artificial distortion by external companies. Jane Street fundamentally goes against the grain of stock market ethics by artificially boosting or tanking demand for certain shares or options by trading in both the cash market and the options market.

Trading in both is fine, but trading to manipulate one of the markets (mostly the derivatives market) is manipulative. That’s unethical and that’s what SEBI is trying to crack down on.

5) SEBI is protectionist for a good reason. In this case, SEBI prioritizes institutional investors in India over Jane Street’s profits, and for good reason. If SEBI allows Jane Street to continue, that might encourage other companies to exploit this fundamental weakness in the options market in India.

And also, if we think about this from a practical perspective, why is it that many investors trade in options? It’s because you only have to spend a little money to potentially get huge returns when the market’s value goes up. But if you’re fighting Jane Street in the race to make money, it’s like David trying to fight Goliath. Unless we find the stone and the sling (which was momentarily discovered during the whole GameStop incident), no retail investor can make money in options except if he is lucky because of the unpredictability caused by market-shifting forces like Jane Street’s investment strategies.

This is further proven by the fact that 91 percent of retail traders lose their money in trading derivatives this year, but people are still delusionally trying to make hundreds of thousands of dollars from a few thousand dollars in investments.

Now that we’ve seen how Jane Street affected everyday retail investors in India, how can we fix this? As I’ve been writing this, I’ve been thinking about some solutions which could work if implemented properly:

1) Restrict derivatives intraday index trading to a capped amount: This isn’t the most optimal solution for all stakeholders involved, but it does limit the amount Jane Street can profit from Indian markets without completely ruining retail investors’ chances at making money of options.

2) Early detection: The issue with this particular case is that it took SEBI years to even detect what Jane Street was doing in the Indian markets. Potentially using AI/ML models to detect abnormalities (especially in derivatives intraday index trading) in trading volumes or detecting consistent patterns (like BANKNIFTY being heavily traded by Jane Street and then immediately being sold off later on in the day) could nip manipulative actions in the bud. Regulators should start looking at both markets simultaneously in order to get a clearer picture of what is actually going on behind the shadows.

3) Tighten rules around expiry days: Options fall under a weekly expiry, so the closer you move to the expiry day, the more volatile the option (as you have equally likely chances sometimes of making a profit/loss). That’s why big traders like to manipulate the prices during those times because they can make their options pay off. One way of fixing that would be to cap the amount you can trade on the expiry day in order to discourage huge investors from manipulating the market at the last minute.

In conclusion, India has learned the hard way how it feels to be the target of one of the largest quantitative trading firms in the world but it doesn’t have to happen again. If we can regulate Jane Street’s presence in India, we can inject life again into the options market and help investors responsibly trade without having to worry about the cards that are stacked against them.