Sebi's probe against Jane Street is part of its efforts to mitigate losses for individual derivative traders.
The Securities and Exchange Board of India is probing global trading firm Jane Street's derivatives trading activities in the last three years, suspecting potential manipulation of benchmark indices.
The probe focuses on algorithmic trading strategies in NSE's Nifty 50 and banking indices used by Jane Street, which led to unusually high profits, and this triggered complaints from other firms.
Here is an explainer on what Jane Street is and why Sebi is probing the trading firm:
What is Jane Street?
Jane Street is a leading global trading firm that leverages advanced quantitative analysis to drive its proprietary trading business and client trading activities.
Founded in 2000 by a team of traders and technologists in New York, the firm has grown to employ 3,000 professionals across five offices worldwide.
Renowned for its expertise in exchange-traded funds (ETFs), Jane Street is a significant player in global equities, bonds, and options markets.
How big is Jane Street? How much money does it make in India and globally?
Although the profits made by Jane Street in India and globally are not new, reports suggest that the firm generated $2.3 billion in net revenue from equity derivatives in India in 2024.
Globally, it made $20.5 billion in net trading revenue. Jane Street's net revenue in trading surpassed that of Bank of America and Citigroup in 2024, thanks to its expansion into markets like India.
Why did Jane Street sue Millennium Management in US court, and what is its India link?
Last year, Jane Street sued its rival, Millennium Management, and its former employees, Douglas Schadewald and Daniel Spottiswood.
In its suit, Jane Street alleged that its former employees stole a confidential trading strategy to use in their new jobs at Millennium.
Jane Street's lawyer claimed that the strategy stolen by its former employees was its most profitable one and stated that it earned $1 billion in 2023 using that strategy in a particular market.
The lawyers for Millennium, Schadewald, and Spottiswood inadvertently identified India as the market during their arguments.
Jane Street further claimed that its profits from using the strategy fell 50 per cent in March 2024 due to its competitor using the same strategy.
Why is Sebi probing Jane Street?
Sebi's probe against Jane Street is part of its efforts to mitigate losses for individual derivative traders.
The news of Sebi's investigation follows the closure of one by NSE, India's largest stock exchange, on Jane Street.
In January, the NSE had flagged specific trades by high-frequency traders, such as Jane Street.
This allegedly involved rapid reversal of trades at times at prices far above or below market rates.
What is fuelling the interest of firms like Jane Street in India?
High-frequency trading firms, such as Jane Street, have entered India due to the post-pandemic boom in equity derivatives trading, primarily driven by retail investors.
Jane Street and other foreign funds -- which utilise algorithms and sophisticated trading strategies -- have generated billions in profits.
They had been riding the post-pandemic derivatives trading boom at the expense of India's retail investors.
A study published by Sebi in September 2024 stated that nine out of 10 individual traders in the equity futures and options segment incurred significant losses during the three years from FY22 to FY24, with aggregate losses pegged at Rs 1.8 trillion.
In FY24 alone, individual traders incurred losses worth Rs 61,000 crore.
At the same time, proprietary traders and foreign portfolio investors, which include the likes of Jane Street, booked profits worth Rs 33,000 crore and Rs 28,000 crore, respectively, before accounting for transaction costs.
The Sebi study also revealed that most of the profit was used by entities that followed trading algorithms.
Sebi then took a series of measures to limit retail exposure, including curbs on weekly options and increasing lot sizes.
Feature Presentation: Aslam Hunani/Rediff
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