Jane Street has shook the Indian market with market manipulation. SEBI is conducting a comprehensive investigation into the trading strategy of the American trading firm. Meanwhile, Jane Street and its associated companies have been banned from doing any kind of trading in India. Some reports reported that the US trading firm was doing manipulation in the Indian market since 2023. With this, he earned Currypub of Rs 40,000 crore. Now SEBI has ordered to seize only Rs 5000 crore from it.
Use of special trading strategy for market manipulation
Jane Street’s Indian markets are suspected of using a variety of stretching strategy. He used one of these strategy in the bank Nifty Index. This strategy was used to earn profit on the day of expiry in the options of the index. The company used to contract the call option index in the index. Then on the day of expiry, the cash market used to invest a large investments in banking stocks. This used to climb the bank Nifty. This made Jane Street a big profit on her call options contract. Similarly, if she used to contract for put options, then she used to sell banking stocks to earn a thick profit.
Real game on the day of expiry
The question is, why did she do this on the day of expiry? The answer is that at-the-money-options are very high on the day of Gamma expiry. Small changes in underling also brings a big change in the delta, due to which the movement in options price increases significantly. The second question, why did he do this in the bank Nifty? The answer is that the Bank Nifty Index consists of big banks like HDFC Bank and ICICI Bank. This makes it difficult to manipulate the bank Nifty. Jane Street only had to buy or sell stocks of these two banks. Then, he had a huge profit on his call/put options in the Bank Nifty Index.
No manipulation in direct options market
The question is why Jane Street did not directly do this in the options market? The reason for this was more liquidity in the market. Retail participation has increased in derivatives after Kovid. Indian markets hold 80 per cent stake in global trading volumes. In such a situation, manipulating direct options is not possible for companies like Jane Street. According to reports, in 2023, the NSE derivatives and cash market volume ratio was more than 400 times. This is the highest in the world.
SEBI was constantly alerting retail investors
SEBI had been warning retail traders for a long time over the increasing interest in options. Later in October 2024, SEBI tried to curb it by making the rules strict. The exchanges had placed an expiry every day of the week to take advantage of the growing volume on expiry day. SEBI believed that it had no role in price discovery and market efficiency. Because of this, he allowed an exchange to only single day expiry. SEBI also increased the contract size in the index derivatives. Margin was also increased for option selling.
Also read: Jane Street’s difficulty is going to increase, SEBI will also check trading in Sensex options
SEBI’s step in the interest of market participants
The action taken by SEBI against Jane Street has affected the market. However, SEBI’s effort to regulate F&O volume is in the interest of market participants. A large systematic risk has been revealed from the scam of Jane Street. F&O volume coming at a normal level can also affect cash markets. However, at least the correct picture of the market will be revealed.